India: Fiscal deficit – Tied hands, loose ends :: Macquarie Research,

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India: Fiscal deficit – Tied hands,
loose ends
Event
 India announced the central government’s fiscal data for August 2011.
Impact
 Fiscal deficit reached 66.5% of government’s budget estimate (BE)
during Apr-Aug 2011: This compared with 39.7% in Apr-Aug 2010.
Cumulative fiscal deficit has reached 3% of GDP during Apr-Aug 2011 (vs the
budget estimate of 4.6% of GDP for full-year FY12).
 Net tax collections well behind target: The central government's gross tax
collections grew 22.2% YoY in August and 12.2%YoY during Apr-Aug 2011
(FYTD). While FYTD tax collection growth has improved, it remains well
below the BE of 17%. Taking into account assignment to states, net tax
collection was up only 4.6% during Apr-Aug 2011 compared to BE of 16%.
 Direct tax collections lag, indirect tax collection close/above target:
Within direct tax collections, corporate tax collections declined 13% YoY
FYTD compared to BE of 20% growth. Similarly, personal income tax
collections grew 13% YoY during Apr-Aug 2011, well behind the BE of 18%.
On the other hand, customs duty and excise duty collections rose 27% YoY
and 18% YoY FYTD ahead of BE of 11% and 18%, respectively.
 Government expenditure declined in August, but still above BE: Central
government expenditure declined by 15.6% YoY in Aug 11 and grew 5.5%
YoY during Apr-Aug 2011. While expenditure management seems to have
improved, the growth still exceeds the BE of 4.9%.
Outlook – FY12 fiscal deficit levels to remain high
 In the FY12 budget, the central government is targeting to cut the deficit
significantly to 4.6% of GDP and expenditure growth to 4.9% YoY (using the
revised FY11 numbers). Between FY08 and FY11, the central government’s
expenditure has grown at an average annual rate of 19.5% YoY. We estimate
the central government’s expenditure growth target is aggressive and expect
YoY growth to be higher in lieu of high subsidies incurred on oil, food and
fertilizer.
 We expect revenue collection growth will be affected in FY12 in view of a
moderating domestic growth environment. While indirect tax collections have
been strong so far, there could be moderation considering the government
announced duty cuts on petroleum products amounting to 0.5% of GDP.
 The government has also built in receipts amounting to Rs400bn (US$8.8bn)
through divestments. We believe the government will face difficulty in meeting
the full target in lieu of the current volatile capital markets.
 Overall, we estimate that the central government deficit will remain high at
5.3% of GDP in FY12, with an additional off-budget expenditure of 1.1% of
GDP.