Economists flag fresh concerns over fiscal deficit, growth prospects

Rising global headwinds and a possible revenue shortfall are posing fresh challenges to the Centre’s deficit targets and growth prospects.

The upcoming US sanctions on Iranian oil exports from November 5 as well as a hardening interest rate regime are likely to impact global crude oil prices and currency movements further.

Analysts pointed to fresh challenges to the fiscal deficit including possible shortfalls in disinvestment proceeds and Goods and Services Tax, though the Finance Ministry, which is already battling high crude oil prices and has remained uncompromising on excise duties on fuel, has stressed that the fiscal deficit target will be met.

“When the Budget was presented in February and even later up to May and June, it appeared that the government will be able to easily keep the fiscal deficit under control. The macroeconomic indicators were stable. But now rising crude oil prices and a hardening interest rate regime have completely changed the picture,” said Sunil Kumar Sinha, Principal Economist, India Ratings.

Growth projections

He also pointed to difficulties in meeting the ₹80,000-crore disinvestment target and possible shortfall in collections from GST that have added upside risks to the fiscal deficit target of 3.3 per cent of the GDP. “We have revised down our GDP growth projections to 7.2 per cent for the fiscal from our earlier estimate of 7.4 per cent,” he said.

The economy grew at a two-year high of 8.2 per cent in the first quarter of 2018-19. The Budget had highlighted the risks from rising crude oil and commodity prices but had assumed a crude oil price of about $65 a barrel. North Block officials were also confident that the US dollar would remain range-bound at the time.

But six months later, crude oil prices have crossed over $80 a barrel and traders have projected it could touch $100 a barrel by the year-end. The rupee has breached 72 against a dollar, leading to pressures on both the current account and fiscal deficits and the Centre has announced a package, including import duty hikes, to arrest its fall.

Meanwhile, the Budget target of raising ₹80,000 crore from disinvestment in public sector enterprises is also seeming difficult due to the volatility in stock markets. As of now, just ₹9,219 crore has been raised.

“There is pressure on the fiscal deficit but it should be met if the Centre continues to pass on fuel prices to end consumers. It will also have to meet the non-tax revenue target, particularly from disinvestment proceeds,” said DK Joshi, Chief Economist, Crisil.

The Centre’s fiscal deficit touched 94.7 per cent of the full-year target between April and August and more updated data for the half year will be available later this month.

NR Bhanumurthy, an economist at thinktank NIPFP, highlighted the current account deficit, inflationary pressures and maintaining a growth of over 7 per cent as the key challenges for the government. “These are all interlinked problems. The picture has completely changed from February and downside risks have increased,” he said, adding that GDP growth of over 7 per cent would lead to high inflation and deficits.

“We do not expect much support to the rupee from the 2.5 per cent to 10 per cent import tariff hike on $10-15 billion of ‘non-essential’ imports by the Finance Ministry. Earlier measures to raise foreign exchange flows by liberalising the corporate bond market were not significant either,” said a research note by Bank of America Merrill Lynch. .

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