New Delhi: Despite a low growth in revenue and economic slow down, Finance minister Arun Jaitley on Thursday stuck to 4.1 fiscal deficit target this year in the Union Budget.
Markets and analysts were expecting that Mr Jaitley may increase fiscal deficit target on back poor tax growth and high subsidies. Some analysts were also expecting that fiscal deficit numbers given by finance minister P. Chidambaram for 2013-14 could be reversed upwards.
“My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1 per cent of the GDP in the current year. Considering that we had two years of low GDP growth, an almost static industrial growth, a moderate increase in indirect taxes, a large subsidy burden and not so encouraging tax buoyancy, the target of 4.1 per cent fiscal deficit is indeed daunting,” said Mr Jaitley.
Finance minister said that difficult, as it may appear, “I have decided to accept this target as a challenge.” He said that one fails only when one stops trying. As per the fiscal consolidation roadmap, fiscal deficit will be further reduced to 3.6 per cent for 2015-16 and 3 per cent for 2016-17.
Rating agency Standard & Poor’s said that the commitment of the new Indian government to maintaining the trend of fiscal consolidation would benefit the sovereign’s credit fundamentals. However, it said the budget announced has opted for a cautious approach toward tackling some of the economy's structural weaknesses.
India’s high fiscal deficit and resultant debt stock of about 70 per cent of GDP are two of the main constraints on the sovereign rating.
“It is unclear how the government will offset revenue loss from tax cuts and raising the income-tax exemption threshold proposed in the budget on the expenditure side” said Standard & Poor’s credit analyst Agost Benard.
On the revenue side, receipts in the proposed budget are boosted by a near 8 per cent year-on-year rise in capital receipts, inflows that are of a one-off nature and therefore don’t consider as part of government revenue, said the agency. Moreover, the agency said it is uncertain whether the goods and services tax, a key component of simplifying the tax structure and raising revenues, will be approved by the end of this year as the finance minister stated.
“The budget is less ambitious in reducing the subsidy burden,” said Mr. Benard. “It promises better targeting of food and petroleum subsides. However, it is not yet clear how that will be achieved, or how much saving it would bring.”
“The negative outlook on the sovereign rating on India indicates that Standard & Poor’s may lower the rating in the next year or so if the new government proves unable to reverse India’s low economic growth,” said S&P. Conversely, the agency said that it could revise the outlook to stable “if the administration can restore some of India’s lost growth potential and consolidate its fiscal accounts.”
