INSUBCONTINENT EXCLUSIVE:
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
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
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
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."
