Fiscal deficit already at 74.6% of Budget target

While Finance Minister P. Chidambaram appears to be winning the battle on the Current Account Deficit (CAD) front, he appears to be losing the war on the fiscal deficit front.

Official data released on Monday showed a lower-than-expected increase in the CAD, which is likely to boost both the currency and bond markets. The current account is the broadest measure of trade, tracking goods, services and investment income.

But an unbridled surge in Government expenditure meant that the fiscal deficit, at Rs 4.04 lakh crore in the April-August period, was already 74.6 per cent of the full-year estimate of Rs 5.42 lakh crore.

With the Government’s non-Plan expenditure continuing to rise, and further big ticket expenses due in the remaining seven months of the financial year, Chidambaram is going to find it tough to control the fiscal deficit at the targeted 4.8 per cent of GDP in the current fiscal.

The CAD numbers also do not look good on closer scrutiny. During the first quarter of the current fiscal (April-June), the CAD rose to $21.8 billion, or around 4.9 per cent of GDP, sharply higher than the 3.6 per cent logged in the immediate preceding quarter.

However, helped by some contraction in gold imports, and a surge in exports thanks to a global recovery and a sharply fallen rupee, which made Indian exports more competitive, this was much lower than the $25-30 billion estimated by various analysts. Also, the prospects look better, going forward.

As Sidharth Birla, Senior Vice-President of FICCI, pointed out: “In July and August, exports registered double digit growth and there has been a sizable contraction in the import demand for gold. With the global economic situation on the mend, our exports should continue to march ahead in the coming months. Further, with the Oil Ministry coming out with a comprehensive oil conservation plan, we could see a dip in oil imports in the subsequent quarters. Such measures would have a salutary impact on CAD.”

Despite the increase in exports, the trade deficit in Q1 of 2013-14 “increased owing to a rise in imports and some decline in merchandise exports,” the Reserve Bank of India said on Monday. “While the squeeze in gold imports would help to contain the CAD in Q2FY14 (July-September of 2013), a subsequent resumption of the same would prevent a secular improvement over the course of this fiscal year. Concerns regarding FII flows in the aftermath of QE tapering are likely to persist, even though FCNR(B) deposits would help to finance the current account deficit,” Aditi Nayar, Senior Economist with ICRA, said. The Government has targeted a CAD of $70 billion or 3.7 per cent of GDP for 2013-14. On the fiscal deficit front, however, the outlook remains grim, with tax collections continuing to be well below target.

(This article was published on September 30, 2013)
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