India will likely miss its revised fiscal deficit target for the financial year ending in March, a Reuters poll showed, putting a question mark over the country's efforts to avert a credit rating downgrade.
Under pressure from global rating agencies and its own central bank, the government unveiled a new plan last week to keep the fiscal deficit at 5.3 per cent of the gross domestic production (GDP) this financial year, higher than a previous target of 5.1 per cent, but lower than last year's 5.8 per cent.
However, higher spending on fuel and fertilizer subsidies along with lower-than-estimated non-tax receipts are likely to keep the deficit at last year's levels, according to a poll of 21 economists.
That could force New Delhi to borrow an extra Rs 40,000 crore via bonds as early as December.
"Measures taken are fairly limited, like a reduction in the subsidy in diesel prices is modest ... and actual data until September shows that the revenue performance is very weak," said Andrew Kenningham, an economist at Capital Economics.
"Growth is not expected to pick up significantly this year so there is no reason to be optimistic that they are going to come near the target."
India's fiscal deficit is the widest among major emerging economies due to huge spending on subsidies for items such as food, fuel and fertilizer.
Subdued tax revenues in a slowing economy have aggravated fiscal strains and both Standard and Poor's and Fitch have placed "negative" outlooks on India's current BBB-minus ratings.
With the prospect of downgrade to junk status looming large, the government has announced a slew of reforms since mid-September, raising the price of subsidised fuel and fertilizer, and lifting the bar on foreign investment in the airline, insurance, pensions and retail sectors to shore up the flagging economy.
Although markets cheered those measures, 14 of 17 economists polled think the latest reforms would not avert a downgrade.
"There is a risk of a rating downgrade as the reforms were only a marginal correction in the fiscal situation," said Kenningham.
Despite the recent hikes in prices of fuel and fertilizer, the government's subsidy bill is expected to remain inflated.
According to the poll, spending on fuel and fertilizer subsidies is estimated to be Rs 1.6 lakh crore this fiscal year, higher than the Rs 1.04 lakh crore budgeted in March.
Under a new fiscal consolidation plan, New Delhi will focus on economizing existing expenditure and reducing waste.
It is reviewing budgeted expenditure at each ministry and plans to defer some spending to the next financial year beginning in April, which government officials say could save about Rs 30,000-40,000 crore.
But analysts doubt that that will be enough to keep the deficit at 5.3 per cent.
"Changes will need to have a longer-term beneficial impact on the fiscal situation, " Kenningham said, noting the government did not make any meaningful announcement last week.
To offset sluggish tax revenues, Finance Minister P. Chidambaram is banking heavily on proceeds from share sales in state-run companies and an auction of telecommunications spectrum.
He aims to raise Rs 70,000 crore through such sales and through the auction of cellphone airwaves. The poll showed economists expected only two-thirds of that amount, Rs 48,000 crore, to be raised.
Not only is a burgeoning fiscal deficit undermining the Reserve Bank of India's (RBI) efforts to control demand-driven price pressures, its funding requirements from domestic savings is crowding out private investment and lowering growth prospects.
In March, the government penciled in gross market borrowing of Rs 5.7 lakh crore for the 2012-13 fiscal year to help bridge a deficit earlier forecast at 5.1 per cent.
However, Chidambaram last week said a revision in the fiscal deficit target would result in additional market borrowing up to the new level, which will amount to at least Rs 20,000 crore.
Last year, the government borrowed Rs 92,900 crore (22 per cent) more than the budgeted amount to fund a deficit that overshot the original target by 1.2 percentage points.
Copyright: Thomson Reuters 2012