Less than a month before budget, risks are growing that government will miss fiscal targets for a second year in a row as it gives in to populist pressures before a high-stakes election.Speculation is mounting of possible cash handouts to farmers and tax exemptions to shore up voter support ahead of polls due by May.
Prime Minister Narendra Modi's Bharatiya Janata Party lost control of key states in elections last month.Economists at Nirmal Bang Equities Pvt.
and Kotak Securities Ltd.
predict a fiscal gap of 3.5 percent of gross domestic product in year through March, compared with a targeted 3.3 percent.
Finance Minister Arun Jaitley is scheduled to give a budget speech on Feb.
1."Increased spending on direct benefits to farmers would make achieving fiscal deficit targets even more challenging," said William Foster, a senior credit officer at Moody's Investors Service in New York, citing limited scope for government to increase its revenue resources in near term.Moody's handed India a rare upgrade in 2017, hoping reforms such as introduction of a countrywide sales tax and bankruptcy code will pay off in long term.Bond YieldsThe government, which had already exceeded its annual deficit target in October, faces a huge shortfall in indirect taxes, while revenue from asset sales and dividend payments from state-run companies are subdued.Investors are already pricing in weaker fiscal numbers.
Yields on 10-year benchmark have shot up in past few weeks, while rupee has slid.Teresa John, an economist with Nirmal Bang in Mumbai, says handouts to farmers are unlikely to happen this financial year.
And while some initial estimates peg cost at over Rs 2 lakh crore ($28.3 billion), or 1.2 percent of GDP, she said it's unlikely to be that high as states may share cost."Such a direct benefit transfer scheme may subsume some of existing food and fertilizer subsidies," John said.
Assuming some cost is shared by states, additional net expenditure may be around Rs 1 lakh crore, or 0.5 percent of GDP, she said.
She sees a fiscal deficit of about 3.5 percent of GDP in next financial year as well.Investors will be keen to know where additional funds will come from.
While government's small savings pool is likely to make up for some of shortfall, there are chances that Reserve Bank of India may come to Delhi's rescue."An interim dividend from RBI is only way for them to cover these incremental expenses," said Indira Rajaraman, a professor at National Institute of Public Finance and a former board member at RBI.
"So fiscal deficit will be higher than 3.3 percent but not a whole lot higher."