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India’s fiscal deficit – more than what
meets the eye?
Fiscal slippages a growing concern
We met around 30 investors during our road show on the Indian economy and
strategy in Hong Kong and Singapore last week. One of the biggest concerns
among investors revolves around India’s worsening fiscal deficit. India’s fiscal
situation has deteriorated sharply since the credit crisis. For FY12, we expect
India’s consolidated fiscal deficit (including off-budget items) to remain high at
8.6% of GDP in the wake of slowing revenue growth and lack of expenditure
management by the government compared to 9% of GDP in FY11 (excluding
telecom licence and BWA collection).
Central government deficit likely to exceed budget estimate
Cumulative central government fiscal deficit reached 3.0% of GDP during the
first five months of FY12 compared with the budget estimate of 4.6% of GDP for
the full year. We estimate that the central government deficit is likely to remain
high at 5.3% of GDP in FY12, with an additional off-budget expenditure of 1% of
GDP compared to the government’s target of 4.6% of GDP.
SEBs losses – a big drag on states’ fiscal health
If we look at the state finances, the state fiscal deficit has improved from 2.8% of
GDP in FY10 to 2.3% of GDP in FY12, as per our estimates. However, it is to be
noted that the huge losses of state electricity boards (SEBs) are not being
reflected in state balance sheets. While the last audited, published review of
SEB finances in FY10 reflected an average loss of Rs.0.86/kWh in India, total
FY11 annual SEB losses (without accounting for subsidy) have been reported by
media to be around Rs700bn+ (US$15bn, 0.9% of GDP). Incorporating the
SEBs losses (subsidy received basis) would result in the states’ fiscal deficit
widening from 2.3% of GDP to 3.0% of GDP in FY12, as per our estimates.
High fiscal deficit responsible for higher inflation
Headline inflation in India as measured by the Wholesale Price Index (WPI)
remained above the RBI’s comfort zone of 5.0-5.5% over the last 22 months.
Indeed, WPI headline inflation has averaged 9.5% over this period. While on
monetary policy, the central bank has already hiked the repo rate by 350bps
from the bottom, and we believe it is the loose fiscal policy that is the main culprit
behind high inflationary pressures. Empirical estimates suggest that a 1% pt
increase in the level of the fiscal deficit could cause about a quarter of a
percentage point increase in the WPI.
Government needs to adhere to the path of fiscal correction
The 10-year GSec bond yields have already increased by about 30bps over the
past two weeks to 8.8% currently on higher than expected government
borrowing for 2H FY12, inflationary concerns and concerns about further fiscal
slippage. While we expect 10-year GSec yields to remain range-bound around
the 8.7-8.8% level in the near-term, considering that the RBI might conduct OMO
to ease liquidity, the possibility of a pause in the rate hike cycle might bring some
temporary relief.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India’s fiscal deficit – more than what
meets the eye?
Fiscal slippages a growing concern
We met around 30 investors during our road show on the Indian economy and
strategy in Hong Kong and Singapore last week. One of the biggest concerns
among investors revolves around India’s worsening fiscal deficit. India’s fiscal
situation has deteriorated sharply since the credit crisis. For FY12, we expect
India’s consolidated fiscal deficit (including off-budget items) to remain high at
8.6% of GDP in the wake of slowing revenue growth and lack of expenditure
management by the government compared to 9% of GDP in FY11 (excluding
telecom licence and BWA collection).
Central government deficit likely to exceed budget estimate
Cumulative central government fiscal deficit reached 3.0% of GDP during the
first five months of FY12 compared with the budget estimate of 4.6% of GDP for
the full year. We estimate that the central government deficit is likely to remain
high at 5.3% of GDP in FY12, with an additional off-budget expenditure of 1% of
GDP compared to the government’s target of 4.6% of GDP.
SEBs losses – a big drag on states’ fiscal health
If we look at the state finances, the state fiscal deficit has improved from 2.8% of
GDP in FY10 to 2.3% of GDP in FY12, as per our estimates. However, it is to be
noted that the huge losses of state electricity boards (SEBs) are not being
reflected in state balance sheets. While the last audited, published review of
SEB finances in FY10 reflected an average loss of Rs.0.86/kWh in India, total
FY11 annual SEB losses (without accounting for subsidy) have been reported by
media to be around Rs700bn+ (US$15bn, 0.9% of GDP). Incorporating the
SEBs losses (subsidy received basis) would result in the states’ fiscal deficit
widening from 2.3% of GDP to 3.0% of GDP in FY12, as per our estimates.
High fiscal deficit responsible for higher inflation
Headline inflation in India as measured by the Wholesale Price Index (WPI)
remained above the RBI’s comfort zone of 5.0-5.5% over the last 22 months.
Indeed, WPI headline inflation has averaged 9.5% over this period. While on
monetary policy, the central bank has already hiked the repo rate by 350bps
from the bottom, and we believe it is the loose fiscal policy that is the main culprit
behind high inflationary pressures. Empirical estimates suggest that a 1% pt
increase in the level of the fiscal deficit could cause about a quarter of a
percentage point increase in the WPI.
Government needs to adhere to the path of fiscal correction
The 10-year GSec bond yields have already increased by about 30bps over the
past two weeks to 8.8% currently on higher than expected government
borrowing for 2H FY12, inflationary concerns and concerns about further fiscal
slippage. While we expect 10-year GSec yields to remain range-bound around
the 8.7-8.8% level in the near-term, considering that the RBI might conduct OMO
to ease liquidity, the possibility of a pause in the rate hike cycle might bring some
temporary relief.
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