Given the sharp pick-up in private demand we believe that the Finance Minister has both the reason and the bandwidth to return to the path of fiscal consolidation in FY11. An upward revision in the GDP base from 1999-2000 to 2004-05 will work in Mr. Mukherjee’s favour as will the likely pick-up in headline growth. The medium-term fiscal strategy statement in last year’s budget (on which the 5.5% fiscal deficit ratio projection is based) assumes a nominal growth rate of 12.4% while the forecasted growth rate in this year’s budget is likely to be close to 14%. Add to this the impact of the new GDP base and the government will have Rs 25,000 crore as additional buffer if it sticks to the 5.5% target.
Nominal growth for the current fiscal year is also likely to be upgraded to 10.6% on the new base as per the Advance estimates released by the CSO in the first week of February. This would have taken the original FY10 deficit ratio targeted on the old base from 6.8% to 6.5%.
However, the final ratio remains contingent on the pass through of the 3-G auction. Fresh news that the auction may actually go through by March this year means that along with the Rs 27,000 crore of disinvestments likely in FY10 ( Rs 12,000 crore have already been mopped up while another Rs 16,000 crore is likely before March,2010 through stake sales in NMDC, Satluj Jal Vidyut Nigam and REC) the final fiscal deficit ratio could be closer to 6.1%.
However, were the 3-G auction to be postponed to next fiscal we would expect a gap of close to Rs 10,000-12,000 crore between the actual deficit figure and the targeted amount and the fiscal deficit to GDP ratio could be close to 6.7%- almost the same as the ratio originally targeted. Irrespective of the slippage however, we are unlikely to see the government opt for additional market borrowings in the current fiscal year and the Centre could use short-term funding options with RBI such as cash management bills to ride over cash mismatches till the next fiscal year.
While indirect tax collection has been weak so far (April-December indirect tax collection stood at 62% of BE), direct tax collection has turned around quite impressively (April-December collection was 67% of BE) and will likely offset any shortfall in tax revenue on account of indirect taxes. We therefore do not expect tax revenue to deviate too much from budget estimates for FY10.
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