Meeting targets critical but squeezing PSUs a bad idea
As RBI decides on whether to go for a 25 bps or a 50 bps repo cut later today—“the balance of macroeconomic risks suggest continuation of the calibrated stance while increasingly focussing on growth risks”—a critical input will be its view on the fiscal deficit. So if the finance minister is actually able to deliver a 5.3% fiscal deficit as he has been promising on his roadshows, as compared to the consensus view it will be around 5.8% of GDP, this will go a long way in addressing RBI’s fears—and increase the chances of more rate cuts after the budget. Sticking to the revised 5.3% target will also help convince investors India is back on a growth path as it was the fiscal profligacy of the past few years that is largely responsible for the fall in savings and therefore investment in the country.
Given how gross tax collections rose just 15.1% in April-November as compared to the budget target of 19.5% and the big slippage on the telecom auctions (R9,400 crore so far versus the target of R40,000 crore) and on disinvestment receipts (R6,925 crore so far versus the R30,000 crore target), it’s difficult to see how the finance minister can possibly achieve his target. Yet, some clear trends are worth focusing on. Delaying subsidy payments—oil PSUs haven’t got the full payments for even Q1 and this was received only this month—has ensured such outgo rose just 6.4% between October and November and just 4.3% the month before; these payments rose 15.9% (month-on-month) in September, 26.3% in August and 83.2% in July. Delaying subsidy payments to oil and fertiliser companies is a bad idea considering this will set back their investments, but is perhaps unavoidable in the circumstances. And though the budget targeting a R26,000 crore subsidy reduction always looked like an invitation to trouble, the finance minister may have an ace up his sleeve here if finance ministry data is anything to go by. The finance ministry’s monthly report for May showed an outgo of R1,46,951 crore for FY12 on account of major subsidies as compared to the revised estimates of R2,08,503 crore for FY12—in other words, there could be a R62,000 crore cushion here.
What’s even more interesting is the sharp expenditure compression, something RBI’s macro-review on Monday said was critical. Non-Plan expenditure in April-November was 64.4% of the budget target as compared to 66.1% in the same period last year; for Plan expenditure, the figure is only 46.7% versus 50.1% last year. A 2 percentage point reduction in total expenditure, to put this in perspective, will shave off R30,000 crore from overall expenditure. This may still not be enough to get to the 5.3% target considering the big telecom and disinvestment gaps, but there’s still two months left—apart from the R25,000 crore pipeline of announced sales like NTPC and MMTC, there’s R17,000 crore to be got from Anil Agarwal if the government pushes the sale for which it has been in talks with Vedanta officials for some months; there’s a R40,000 crore bonanza waiting in the form of SUUTI (perhaps next fiscal for the last two?) and, given some realism on telecom pricing, the next auction may just do better. If election populism like a fully rolled out Food Security Bill doesn’t take over, RBI may find it easier to cut policy rates in the months ahead.