“Reforms in government policy will not control the fiscal deficit”

Substantial FII inflows are anticipated, if the government’s proactive stance on reforms continues. However, these measures are insufficient to significantly reduce fiscal deficit. A FY13 fiscal deficit of 5.8% of GDP has been forecast, as there is no magic wand to reign in government expenditure, according to Standard Chartered Bank

Although the government is keen on gaining mileage with the public and UPA (United Progressive Alliance) coalition partners through reforms in policy-making, these measures would have little impact on the growing fiscal deficit, which is a huge problem the economy faces. The fiscal health of the government is in a fragile state. Recent government efforts to contain the fiscal deficit are commendable, points out Standard Chartered Bank. Specifically, it announced measures to contain fiscal slippage: increase in fuel prices and divestment plans. But this will not be enough. Here are the grim fiscal numbers.
On 13 September 2012, the government announced revisions to administered fuel product prices. It is expected that the increases in diesel and cooking gas prices would reduce the FY13 fiscal deficit by only 0.1% of GDP, after adjusting for the reduction in excise duty on petrol.
Disinvestment Proceeds
Having made no divestments in the first five months of FY13, the government announced the divestment of its stake in one company (Rs75 billion), and approved the sales of four others in principle (Rs150 billion). If the government approves the offer (Rs200 billion) from a private sector company to buy direct stakes in two other public sector entities, then it could exceed its initial target of Rs300 billion of divestment proceeds. These share sales could result in substantial FII (foreign institutional investor) inflows if the government’s proactive stance on reforms continues.
However, these measures are insufficient to significantly reduce fiscal slippage. It was not expected that the government would meet its FY13 fiscal deficit target of 5.1% of GDP, and a combination of factors will lead to significant slippage. “We forecast a FY13 fiscal deficit of 5.8% of GDP, higher than our previous estimate of 5.3%”, Standard Chartered Bank said.
Net Tax Collection
Indian corporates and households claim tax refunds for taxes deducted at source. The government makes such refunds on a regular basis; it is therefore important to consider net direct tax collection, rather than gross direct tax collection, when assessing the fiscal deficit. If tax refunds accelerate in the next few months (India refunded Rs980 billion in FY12 and Rs710 billion in FY11), this could dampen net collection. Gross tax collection, especially of corporate tax has actually contracted by 1.5% year-on-year and so the risk of slippage in net direct tax collection is quite likely. The Finance Ministry is targeting an additional Rs300 billion in direct tax revenues by wielding the stick,  slippage of 0.1%-0.15% of GDP in net direct tax collection – and thus overall tax collection – is probable, finds Standard Chartered Bank.
Spectrum Sales
Proceeds from spectrum auctions in the telecom sector will be much lower than expected. The government has budgeted receipts of Rs400 billion (0.4% of GDP) from telecom spectrum auctions. However, as the sector is currently going through a rough patch and the government recently revised guidelines to allow staggered payments over the next 10 years, a slippage of 0.2% of GDP from the targeted level of spectrum auction proceeds is highly likely.
The government is unlikely to meet its ambitious target of capping the subsidy burden (India subsidizes food, fertiliser and fuel products) at below 2% of GDP in FY13 (2.4% of GDP in FY12), despite the increase in fuel product prices. The subsidy bill could easily reach 2.5% of GDP in FY13, much higher than the budgeted 1.9%. The fuel subsidy bill may exceed the budgeted amount by 0.4% of GDP. The food subsidy bill may increase by 0.2% of GDP thanks to increased minimum support prices for several crops.
Government Expenditure
Expenditure grew by 16% in April-July 2012 on higher revenue expenditure, against a budgeted 13% increase in overall expenditure in FY13. Although the government has been trying to cut expenditure, this has had little effect because almost 60% of total government expenditure if fixed in nature—21% of total expenditure goes to interest payments, 13% to subsidies, 13% to defence and 4% to pensions. 
In May 2012 the government announced plans to cut expenditure by Rs70 billion. The impact is not visible. Even if the government achieved these reductions, as well as lower defence spending, it is believed that the expenditure would still remain high. The defence minister has announced that steps will be taken to curb unnecessary expenditure growth. Assuming 10% growth (in line with the average of the past two years) rather than the budgeted 13%, the government could save 0.05% of GDP.
The lack of past expenditure reforms and slower tax revenue generation, amid weaker domestic growth, will lead to another year of high fiscal deficit, says Standard Chartered Bank. The FY12 fiscal deficit was 5.9% and so a deficit of 5.8% in FY13 would reflect the lack of progress. An even wider fiscal deficit cannot be ruled out, remarks Standard Chartered Bank. 
This implies that India’s weak fiscal health may come under further scrutiny, especially by the rating agencies. Even if the government is able to offset some fiscal slippage by divesting substantial shares in public-sector companies, the quality of its commitment to fiscal consolidation may still be questioned, concludes Standard Chartered Bank.



Bakul Gandhi

5 years ago

Gold is unproductive investment. Government should come out with Gold Bond with nomminal 1% or 2% interest, maturity 10 years.
First, Government takes oevr all Gold lying with Temples and other charitable organisations. This will help the charitable organisations to undertake Social welfare causes.
Secondly, the Government should issue these bonds to individuals upto a limt, say 500 gms per child. This will help in reducing need of buying gold. In turn, this will reduce Foreign Exchange deficit. In turn, depreciation of Rupee will be reversed. This will help in reducing the cost of import of crude oil.
Fourth, offer physical gold to exporters of jewellary.
At any given time, physical gold need will be by rough estimate not more than 20-25% of gold bonds. Today, people are not sure of purity of gold and therefore will get attracted to bond. This bond may be freely transferableto individuals, subject to maximum of 500g per child limit.

Vinayak Bhimarao Mudholkar

5 years ago

The so called 'reforms' are useless. The real causes of deficit are uncontrolled govt. expenditure, no proper use of material & manpower (especially in govt.), rampant corruption, various unnecessary tax rebates, tax evasion, the feast of natural resources to corporates, debt restructuring, love for gold, no incentive for alternative energy, no production of electronic hardware in india etc. The experts do their job of brain washing in favour of the rich; nothing else.

Yes Bank gets RBI nod to start stock-broking biz

The new-age lender, amongst the last of the banks to be granted licences, will invest up to Rs25 crore and enter the highly competitive fray in early FY14

Mumbai: Private sector lender Yes Bank today said that it has received the Reserve Bank of India (RBI) nod to enter the equity broking business, reports PTI.
The new-age lender, amongst the last of the banks to be granted licences, will invest up to Rs25 crore and enter the highly competitive fray in early FY14, sources said.
A majority of its rivals are already into the equity broking business and addition of the product will add to Yes Bank’s bouquet of offerings.
The bank’s founder, managing director and chief executive Rana Kapoor said it has been granted approval by the RBI to establish a brokerage subsidiary and the timing for the same coincides with the bank’s thrust on retail.
The composition of the low-cost current and savings account (CASA) for the bank is among the lowest in the industry and it has been leveraging on the savings bank interest rate de-regularisation by the RBI to gain more deposits by offering higher interest rates.
“The latest offering will also further drive the bank’s CASA momentum, besides opening up avenues for fee income,” it said in a statement.
A slew of pure-play brokerages have been bleeding since the past one year so due to high volatility in the market and lowering of commissions by the exchanges. Mandates for takeover of some brokerages are also floating in the market.


Core sector growth slows to 2.1% in August

The moderation in growth was on account of the negative growth in the production of natural gas, cement, fertilisers and crude oil, besides a decline in the growth rates of steel and electricity production

New Delhi: Eight core industries grew at a slower pace of 2.1% in August against 3.8% in the same month last year due to negative growth in crude oil, natural gas, fertiliser and cement, reports PTI.


During April-August this fiscal, the growth has slowed to 2.8% from 5.5% in the year ago period, according to official data released on Friday.


“The moderation in growth was on account of the negative growth in the production of natural gas, cement, fertilisers and crude oil, besides a decline in the growth rates of steel and electricity production,” it said.


Natural gas and crude oil production contracted by (-) 13.5% and (-) 0.6%, respectively in August.


Fertiliser and cement output also shrunk by (-) 2.1% and (-) 2.4% during the month under review.


Steel and electricity production slowed to 1.8% and 1.7%, respectively. In the comparable month, it was 7.9% and 9.4% in that order.


However coal and petroleum refinery output grew by 11% and 8.4% in August, against (-) 15.2% and 3.8% respectively.


The eight core sector industries have a weight of 37.9% in the overall Index of Industrial Production (IIP).


The growth in core sector industries in May, June and July, too, had moderated to 4%, 3.6% and 1.8%.


In the same months last year, it was 5.9%, 5.6% and 8.2% respectively.


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