Standard Chartered Bank today warned of a 0.2 per cent slippage in fiscal deficit at 5 per cent of India's GDP due to slower revenue growth.
"Our base case is a fiscal deficit of 5 per cent of GDP this fiscal. This is based on the assumption that slippage of 0.65 per cent of GDP revenue proceeds and higher spending of 0.2 per cent of GDP on subsidy/bank recapitalisation, which though will be partially offset by a 0.7 per cent of GDP cut in spending," StanChart economists Samiran Chakraborty, Anubhuti Sahay and Nagraj Kulkarni said in a report.
Finance Minister P Chidambaram has been saying that the 4.8 per cent fiscal deficit target is a red line and that will not be breached.
The StanChart economists said the 0.20 per cent slippage will be due to slower tax revenue collection and uncertainty about realising non-tax revenue. Though the fiscal deficit target can be met by cutting spending, the upcoming elections are a deterrent.
"Based on the trends observed so far on tax collections, we expect tax collection to fall short by 0.65 per cent of GDP this fiscal," the report added.
On expenditure triming, the UK lender said "we believe Government can reduce spending by 0.7 per cent of GDP, which could reduce FY14 expenditure growth to 17.7 per cent and imply growth of 10 per cent in H2. But such reductions will have an adverse impact on the already weak growth."
The report noted the government has crossed 76 per cent of its borrowing target in H1 itself, the widest ever recorded in over a decade.
"The Government's ability to adhere to its 4.8 per cent deficit target will depend on one-off revenue items (disvestment and spectrum auction proceeds) and its willingness to curtail spending.
"It may still be able to achieve the target, but we believe lack of political will to curb expenditure ahead of the elections will keep these concerns a risk to the Indian economy," the report said.
On the impact of the 76 per cent drawal in H1 alone and its implications for H2, the report said sharp widening of fiscal