Sep 26, 2013 02:37 PM IST | Source: CNBC-TV18

Can't cap fiscal deficit at 4.8%; polls to up costs: ICRIER

Shankar Acharya of ICRIER is skeptical on government's abilities to meet the fiscal deficit target of 4.8 percent. He also feels that key investment decisions may be delayed due to upcoming elections.

Economists are wary about government’s ability to address core issues, reflected in Shankar Acharya of ICRIER (Indian Council for Research on International Economic Relations) belief that the government will not be able to meet the fiscal deficit target of 4.8 percent. The current account deficit (CAD) also needs to be brought down to 2-2.5 percent levels, he told CNBC-TV18.

Acharya foresees expenditures to rise going forward. Upcoming general elections may be responsible for no reduction in expenses. Major investments decisions are also unlikely till then, he says. Government’s subsidies may also be higher to cope with the rupee’s fall, he adds.

Also read: RBI plans more steps to ease liquidity situation

Below is the edited transcript of his interview to CNBC-TV18.

Q: The Finance Minister (FM) is quite clear that he has drawn a line 4.8 percent of fiscal deficit will not be crossed. We haven’t see too much of divestment or diesel price action. Is this 4.8 percent a realistic number?

A: I find it more and more difficult as the time passes to think that it is a realistic number. There in mind the following.

The talk two weeks ago of a significant increase in diesel prices seems to have vanished. Most recently, the petroleum minister has said that there is no such proposal on the table.
We all know that with the rupee-dollar parity, being where it is, there must be higher subsidy to cope with compared to budget with regard to petroleum and fertiliser. Actions in the divestment don’t seem to happen. Revenue numbers don’t suggest any move in tax revenues as the industrial economy is very weak.

All this is consistent with the April-July fiscal result from the central government. Fiscal deficit is running at about 60 percent of the full year budgeted number in the first third of the year. It may not have any immediate consequences but it certainly clouds the future. It is hard for me to see it at 4.8 percent of gross domestic product (GDP) figure.

Q: If in case the government wants to stick by that 4.8 percent target and revenues aren’t enough for it to suffice to that target, then the other option is cutting non planned expenditure which we have already seen happened around 10 percent? Do you then think that there could be further repressions on GDP growth as most of the brokerages as well as yourself are around at 4.5 percent for this fiscal? Could there be a downside surprise to that figure?

A: My worry is the impact on the fiscal deficit itself. If the fiscal deficit in the last quarter of the financial year seems unattainable, the targets are bound to have some repercussions. It will on the expectation that there will be more than anticipated or more than announced government borrowing.

There will be upward pressure on the long bond rate and related segments. People tend to focus when they talk about interest rates on the short-term policy rates and then think of the transmission from there to the long term.

Ultimately things like quantum of government borrowing has a direct impact on the interest rate in the market and that is where I would worry that something back will come.

On the growth rate, I suppose is that if there is a savage cut in expenditures, frankly I don’t see that as feasible with election drawing closer. But if there is such a savage cut, then that kind of tends to moderate further the growth projections. Those elements of GDP, which are directly sensitive to government expenditure levels, will be hurt.

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