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Markets will remain closed on 26th June, 2017 on account of Ramzan EID.

FY17: Will the Fiscal Deficit Target Be Met?
Tue, 7 Jun Pre-Open

Recently, the government announced that India met its fiscal deficit target of 3.9% of GDP (gross domestic product) for the last financial year (FY16). Further, it retained the budget estimate fiscal deficit target for FY17 at 3.5% of GDP. While the target for FY16 was met, will the same be the case for FY17 too? Let us look at some factors to answer this.

Fiscal deficit is the difference between what a government earns and what it spends during the course of any year. The difference is met through borrowings. A drop in fiscal deficit means higher revenues earned or less expenses incurred by the government.

The government expects fiscal deficit for FY17 to be lower on the back of a host of factors. Some of these include a normal rainfall, improved buoyancy in domestic growth, higher tax collection, and subsidy rationalization. Also, the government plans to collect majority of its revenues through the divestment route. However, given the past record of the government, these assumptions are clearly looking overoptimistic.

The Indian Meteorological Department (IMD) has forecasted a normal rainfall this year. However, past data shows a wide gap between IMD's forecasts and actual rains. So, to rely too heavily on the forecast of a good monsoon would be risky. As far as the government's divestment plans are concerned, they appear inflated to us. The government has a tendency of pushing deadlines depending on stock market conditions.

Apart from the above, we have the problem of loss-making public sector undertakings (PSU). Several PSUs continue to incur heavy losses and the government seems to be making no effort to sell them off or shut them down. These, in turn, will increase the government's expenditure and eat up taxpayer's money. Lastly, not to forget the issue of rising non-performing assets (NPAs) that have kept Indian PSU banks in a precarious state.

In short, there are many factors to consider before accepting the government's fiscal deficit projections at face value.

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