Can the Government Fill This Hole?

One of the big challenges that India faces today is huge fiscal deficit and Current Account. The Finance Minister has time and again asserted that the fiscal deficit target will not be breached. But if we look at the numbers it seems that the FM will not be able to keep his words.

According to the latest data, India's fiscal deficit touched Rs 5095. 5 bn during April-November 2013. This means it has already touched 93.9% of the annual target of Rs 5429.4 bn. This means the government ran an average fiscal deficit of around Rs 636.9 bn per month (Rs 5095.4/8) during that period. Now in order to meet the target, the government can run an average fiscal deficit of around Rs 82.3 bn per month for the next four months. This implies a gap of Rs 554 bn (636.9-82.3) per month or Rs 2218.4 bn over a period of four months has to be raised from somewhere else.

So from where will the government get the money? Considering that the government has already fallen short of its revenue target. Tax collections form nearly four fifths of the government's earnings. And given the slowdown in the economy, it will be highly ambitious of the government to bank on it. Hence, the only way the government can hope to meet its fiscal deficit target is by cutting expenditure. But in an election year, it seems very unlikely.

The government is also banking on windfall gains from the sale of spectrum or disinvestment. But, in our view it doesn't solve the problem. In fact, such one-time bonanzas reduce the incentive of politicians to curb wasteful expenditure and plug revenue leakage. Instead, such one-time gains should be deployed for specific purpose like building infrastructure. The gap in yearly accounts must eventually be solved through everyday effort to shore up tax revenues and running a tight ship.

A deeper government reform is needed to root out corruption and build a modern administration suited for the 21st century. Without this India may see spurts of growth - but not sustained long-term growth. India has run large fiscal deficits in the past, but with a mostly open capital account India cannot afford to do this and have a stable macro-economy.

We would like to remind our readers that we have written on this idea before. But with barely 84 days to go for the fiscal year to end, we thought we would update you on where the government stands on its fiscal targets.

Will the FM manage to keep the fiscal deficit target at 4.8% of GDP? Let us know your comments or share your views in the Equitymaster Club.

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