Weak economic pulse may pre-empt budget goodies

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Fiscal deficit 45% of year’s target in 2 months; May core sector growth slows after April surge; drought-like condition intensifies

Weak economic pulse may pre-empt budget goodies
A sluggish economy with low tax growth, poor industrial output and higher subsidy outgo as reflected by the fiscal deficit data has tied the hands of the government in providing major relief to the common man in the Union budget next week.

Government data relea­sed on Monday showed fiscal deficit — or the gap between government expenditure and revenue generation — ballooned to Rs 2.4 lakh crore in April-May, accounting for 45.6 per cent of the full-year target.

This signals poor tax revenue mop-up due to sluggish economic growth and a sharp rise in expenditure, apparently due to a higher subsidy outgo and a rise in interest costs. The fiscal deficit during the same period last year stood at 33.3 per cent of the budget estimates for the whole year. The deficit figure for the whole of FY14 stood at Rs 5,08,149 crore, or 4.5 per cent of GDP.

Deferred subsidy payments and unpaid bills of the previous government will only add to the woes of the Modi regime through the year.

Industrial growth remains tardy. Government data on Monday showed core sector industries expanded at the slowest pace in four months in May. The eight infrastructure sectors, which account for 40 per cent of industrial output, performed poorly at 2.3 per cent after showing a healthy bounce in April at 4.2 per cent. Core sector growth stood at 5.9 per cent in the same month a year ago.

Poor monsoon rain has only added to the worries. The weather office on Monday said rainfall was 43 per cent below average in June, the weakest first month of the season in five years. With a monsoon failure looming large and drought-like conditions intensifying in several parts of the country, the finance minister can ill-afford to get generous in his budget, lest his fiscal maths go haywire.

Middle-class taxpayers, a BJP constituency, are expecting a hike in the income-tax exemption limit by at least by Rs 1 lakh to Rs 3 lakh and the cap on tax-saving investments to Rs 2 lakh from Rs 1 lakh at present. With the tax mopup position not too comfortable and the fiscal deficit rising, it would be interesting to see if and how the finance minister manages to offer any income-tax relief.

Inflation, particularly food inflation, is not within the comfort zone yet.

The government will have to do some tightrope walk to ensure that it doesn’t go out of hands due to drought.The Iraq situation too can contribute to the worsening fiscal situation, if crude prices continue to surge till October or beyond. The government on Monday increased prices of petrol by Rs 1.67 per litre and that of diesel by 50 paise in view of surging crude prices. A monsoon failure will only increase diesel consumption for pump sets.

The fiscal deficit data should be interpreted with caution, said Aditi Nayar, senior economist at Icra. Inflow from certain revenue streams — including disinvestment and gross tax revenues — is usually low in the initial months and several commitments are spread out fairly evenly throughout the year, including salaries, pensions, interest payments and devolvement of taxes to the states, she pointed out.

Official data showed revenue deficit in April-May stood at Rs 2,05,080 crore, or 53.6 per cent of the full-year estimate. About 30 per cent of the increase in total expenditure in April-May was on account of higher interest payments. Also, the release of major subsidies appears to be substantially higher during April-May compared with the same months in 2013. This contributed to the higher revenue expenditure.

Nayar was positive about industrial output. Notwithstanding the moderation in core sector growth, a favourable base effect and the year-on-year double-digit rise in merchandise exports in May would have boosted IIP activity that month, she said.

Deterioration in steel and gas output relative to the previous month was largely responsible for the poor core sector growth outcome in May. Crude oil (-0.3 per cent), natural gas (-2.2 per cent), refinery products (-2.3 per cent) and steel (-2 per cent) recorded negative growth while three other industries — coal, fertilisers and cement — posted improved growth at 5.5 per cent, 17.6 per cent and 8.7 per cent, respectively.

“The year-on-year rise in passenger vehicles production (Siam pegs it at 4 per cent in May) after several months and sustained growth of two-wheeler output would support manufacturing growth in May,” the Icra economist postulated. The production of commercial vehicles, however, continued to contract during the month.

During April-May, growth in the eight core industries slowed to 3.3 per cent against 4.9 per cent in the year-ago period.

Nayar said a decline in the short-term external debt of the government was good news, as it reduced the vulnerability of the economy on account of refinancing risk in the near term. “While the FCNR(B) inflows and overseas borrowings raised by banks widened the debt stock in September-November 2013, they simultaneously enhanced reserves,” she said.

A considerable portion of the NRI deposits raised since September 2013 has a minimum tenure of three years. The proportion of short-term debt by residual maturity within the total external debt declined to 39.6 per cent in March from 44 per cent in June 2013. “As a result, the vulnerability on account of refinancing risk has declined,” she added.


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