Government may take steps to ease fiscal concerns

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The government may partially withdraw both excise and service concessions and possibly reintroduce surcharges at its budget to initiate fiscal consolidation, Citigroup said in a note on Wednesday.

Improved tax collections due to better growth, government focus on divestments, 3G license auctions, and small subsidy cuts, would enable the government to stick to its medium-term fiscal deficit targets of 5.5% in FY11, Citi said.

"Heightened EU sovereign risks will likely raise the markets desire to see steps towards fiscal consolidation when India announces its upcoming FY11 budget and the report of the Thirteenth Finance Commission at the end of this month," economists Rohini Malkani and Anushka Shah wrote.

"If one superimposes Asia with the rest of EU in terms of fiscal health, India stands out as most fiscally vulnerable with ratios analogous to the so called fiscal sinners of Europe."

Structural measures such as implemetation of the goods and services tax (GST) structure and the direct tax code may be implemented in 2011, they added.

However, India's deficit may not be as much of a concern as EU countries. The country funds funds its deficit through domestic sources and there is a large captive demand for bonds in India, they added, referring to state-owned banks, the biggest holders of federal paper.

Growth being higher than real interest rates gives India more flexibility in running primary deficits without leading to a rise in public debt to GDP ratios, it added.

Citigroup also said it expects reforms in the subsidy component as studies have shown that very little actually reaches the target.

However,the caveat against reform would be the impact on inflation and the need to continue to subsidize given a drought year, it added.