India's FY15 fiscal consolidation plans moving at turtle's pace

Expenditure has overtaken revenues significantly.

India's progress on the FY15 (April 2014 to March 2015) fiscal consolidation plans has been slow, with the April-August 2014 fiscal deficit already standing at three-fourths of the full-year goal.

According to a research note from DBS, further, expenditure has outrun revenues by a significant margin.

By August, total expenditure stood at 38% of the full-year allotment, while tax revenues lagged at 19%.

Meanwhile, indirect and direct tax collections are also running below the required pace.

But the annual deficit target of -4.1% of GDP might still be met. A mix of external/one-off developments and late start to the divestment program will aid efforts.

Here's more from DBS:

Firstly, lower global oil prices have provided considerable comfort to the subsidy bill. Added to this was the recent move to deregulate the diesel sector, which helps lower the fuel subsidy allotment for second half of the year.

At the same time, delays in the nationwide rollout of the food subsidy program might result in lower food subsidy outlays. This is significant as even through fuel subsidies were lowered by 25% in the FY15 budget, food allocations were raised by a quarter, keeping total subsidies at circa 2% of GDP.

On the other hand, revenue generation from big-ticket divestments is yet to start. The process, which was to start last month, was put on hold due to the volatile equity markets. Latest signs are that the process will start in Nov, with 10% in Coal India and 5% in ONGC (Oil and Natural Gas Corp) on the block first.

Recent diesel deregulation and increase in gas prices have improved the outlook for these companies and the strong proceeds might be sufficient to meet a bulk of the divestment target.

Longer-out, efforts to channel the subsidy benefits through the banking system could help plug leakages, improve transparency and result in savings of circa 0.4-0.5% of GDP according to a task force.

In all, considerable work needs to be done in the second half to meet full-year targets. February’s budget for FY16 is the next key event on the horizon, with inputs from the Expenditure Commission’s interim report likely to help rationalise unproductive spending. Revenues will be contingent on economy’s recovery pace and push through on the GST.