Budget 2013 India: Risk of slippage in FY14 fiscal deficit remains, says CLSA

P Chidambaram may have tried his best to arrest the widening fiscal deficit in the Budget 2013, but the risk of slippage in 2013-14 fiscal deficit still continues, Rajeev Malik of CLSA told CNBC TV18.

While the finance minister has pegged 2013-14 fiscal deficit at 4.8 percent, Malik believes that actual fiscal deficit could come to 5-5.1 percent. 
"After all the assurances that the Finance Minister has given, the very fact that there is a risk of slippage in itself raises a question. Secondly, go back to last year's Budget which was heavily reliant on two items, spectrum and divestment. Same is the case with this one," says Malik.
The government has miserably failed in its attempt of selling spectrum in current financial year. It failed to mop up targetted Rs 40,000 crore from spectrum sale in FY13 and has yet kept the target for next fiscal as high as Rs 41,000 crore. The government has also not yet met its disinvestment target of Rs 30,000 crore for the fiscal.
Malik discusses several issues with the government projections. Below is the edited transcript of Malik's interview to CNBC-TV18. Q: What did you make of the gross domestic product (GDP) tick? How much would you have to change estimates now?
A: It is definitely a disappointing outcome. We were going with 4.8 percent and it came in at 4.5 percent. There are a couple of things to bear in mind. Most likely, March too will be close to or slightly under the 5 percent-handle. I do not think the FY14 outlook is going to change a whole lot, bear in mind part of the reason that the worse than expected numbers are coming because of the severe spending cuts. The underlying details in the Budget suggest that some of that spending is going to come in the second half of FY14, which is tactically very well timed with the election calendars. So, purely on that count, I would not be too negative.
However, the kind of improvement we see from hereon is going to be very slow and gradual at best. Q: The other question marks have started coming up about the quality of the 4.8 percent fiscal deficit target that the Finance Minister has outlined. Given the kind of spurt in expenditure that is laid out for FY14, do you think the takeaway from that number should be one of reassurance or full of question marks?
A: The Budget on that count is a paper tiger one. It is somewhat strange that after having spent fair amount of time and gone through with some politically sensitive and constructive decisions, one thing most people wanted to see was that there should be no fuzzy math as far as the Budget is concerned.
Here, unfortunately there are a couple of issues. One is that there is risk of slippage. Whether that happens or not is a separate issue. However, after all the assurances that the Finance Minister (FM) has given, the very fact that there is a risk of slippage, in itself raises a question.
Secondly, if one goes go back to last year's Budget, it was heavily reliant on two items, spectrum and divestment. The same is the case with this one. Infact, if one goes a step further, adjusts the Budget math with the way International Monetary Fund (IMF) does its numbers and treats these as financing items rather than revenue items that the government conveniently shows as, there is not much fiscal correction at all.
Finally, the Budget is not shamelessly populist but it is definitely a pre-election Budget. This is as far as rural development spending is concerned. It is hard to convince people about the seriousness attached to the consolidation process at a time when total spending is going up 16 percent. Q: Where does all this leave the Reserve Bank of India (RBI) where there are question marks about whether or not this fiscal deficit figure comes through while on the other hand, there is an extremely poor GDP tick?
A: This is why the bias is still for the RBI to ease. I certainly expect them to cut rates this month and I would not be surprised if they cut rates again in the annual policy meeting. One needs to remember the kind of complex factors India is going through. Even if there is a slippage on the fiscal deficit, do not forget atleast there is a certain adjustment that is coming through. RBI cannot ignore that and it certainly cannot ignore the sub-5 percent GDP print. I do not think it wants to wait until GDP is almost near zero to start getting much livelier monetary response. Q: How we reached 5.2 percent this year is clearly through camping down completely on planned expenditure in the last couple of quarters. The FM may not have the luxury of doing that in the second half of next year running into elections. So, for some reason if his revenue targets fall short because of slower growth, do you think he might not be able to meet that 4.8 percent and land up with 5 percent and then the rating agencies might start fretting once again? Do you think that is possible?
A: It is certainly a possible scenario. Infact, our underlying worry is that the actual fiscal deficit is more likely to be 5 percent, possibly 5.1 percent. It is easy to show numbers on paper but will all the stuff come through in terms of delivery etc remains to be seen. There was a bit of breather in FY13, we were not very close to election so one could go through the exercise of severe spending cuts. This luxury will not be available next year. So, that adds more on the pressure. Q: The S&P note on ratings has tinged to a lot of skepticism both about the figure, the revenue estimates and how they plan to get there. At the end of this entire Budget exercise, would you say that from a ratings agency point of view, we are still as much under-risk as we were before the event?
A: I would say so, because while nobody would doubt or give credit to Chidambaram for having done quite a few constructive measures, it is somewhat unfortunate that just the arithmetic of the Budget and the doubt it raises, tends to compromise the intent and the way forward. People do not necessarily fret too much about 0.1 percent of GDP here or there, but the very fact that there is a potential risk is something that should not be ignored. As we get closer into the second half of the year, the political noise is only going to increase, not lessen. Q: You have pointed out for some time now that the investment cycle is not going to be switched on that easily. There did not seem to be enough impetus on that in the Budget, because if we have to get out of this growth problem, we need that to get started. Did you see anything adequate in this Budget to ensure that the investment cycle will be better in FY14 than it was in FY13?
A: Given the monumental task ahead of us, the response was clearly more of a whimper than anything more dramatic or relevant. However, bear in mind, this is a federal Union Budget. There is a lot more that can be done. My disappointment is more in terms the CCI. The pace at which things are moving needs to be stepped up a lot more because if we do not begin to see some favourable impact from the investment cycle, then we remain 5 percent, possibly sub-5 percent for quite long.