Revised fiscal deficit target may hurt growth: Experts

Short term the announcement may lead to positive sentiments in the market. But in the medium-term this is leading to a further slowdown in the economy, says Sanyal. "We are getting into a situation where every year we are at the last moment trying to meet the fiscal deficit target by cutting expenditure," he adds.

Aditi Nayar, Economist, ICRA, too feels there is a need to examine the quality of fiscal adjustment and its impact on the wider economy. "There are some expenditure cuts which would have limited impact on growth and that is possibly where the government would want to start - by prioritising expenditure cuts," she adds.

Below is the verbatim transcript of Indranil Pan, Siddharth Sanyal & Aditi Nayar's interview on CNBC-TV18

Q: Our reporter in Delhi Aakansha indicates that the finance ministry now believes that the fiscal deficit number will in fact come in at 4.65 percent as opposed to 4.8 percent. This is predicated on a bunch of different things including a 20 percent cut in planned expenditure and the enhanced revenue that it will make from these special dividends, the Axis Bank stock sale as well as some of the disinvestments or crossholdings that they intend to go ahead with. What do you make of that 4.65 percent number?

Pan: Definitely, structural problems on the fiscal side will continue. The FM is talking about volume of shortfalls that are there and the very fact that expenditure cuts are happening. There is no reason to believe that this is a very solid way of correcting for the fiscal deficit simply because cuts on the expenditure side also would necessarily mean that to a certain extent we might have to give up some of the growth dimensions that we are looking at. So on an ongoing basis I think it does not really necessarily very solidly indicate that fiscal consolidation has been achieved in the Indian context.

Q: Given the reality today would you say that the government had no choice but to do this?

Pan: To a certain extent, yes - simply because we are also looking at the ratings agencies dimension and under this current juncture if they actually would have slipped on the 4.8 percent which was on the cards because as you clearly pointed out that revenue cycle has slowed down in a very significant way it could possibly have legs to a ratings downgrade immediately which needed to be presented at all points in time, because that also has its implications in terms of the flows and even though the current account has been arrested in terms of the overall sort of negative swing that was seen in the last year the capital flows could have once again become an issue if the ratings was downgraded. So this was definitely necessary and the Finance Minister also had been pointing this out as a line in the sand for quite sometime now.

Q: The revised estimate is expected to be around 4.65 percent for the fiscal deficit. How beneficial do you think is it going to be for the economy if at all and the markets that the numbers coming in below that 4.8 percent red line?

Sanyal: It might be a bit of sentiment positive for markets, specially from the rating angle, but as such it is not a permanent solution, so we are getting into a situation where every year we are at the last moment trying to meet the fiscal deficit target by cutting expenditure, but in effect over the medium-term this is leading to further slowdown in the economy and further slowdown in revenue prospect which is putting this issue into a loop.

Q: How do rating agencies typically react to that? Do they just buy to the face value or is there a danger that they may say, listen you are hurting future growth, so just cutting it to below 4.85 percent without looking at the quality is not something we will do?

Sanyal: Over the longer term quality matters. But at this moment I think even the rating agencies taking the view for the next few months and the political dynamics six months down the line will become a much bigger trigger for any rating action in case of India.

Q: Sources saying that the 2014 fiscal deficit target is now at 4.65 percent lower than the targeted 4.8 percent. What do you make of this, a pleasant surprise?

Nayar: We need to see what kind of expenditure cuts are going to be entailed to be able to restrict the fiscal deficit to this level. Certainly it is challenging but it is not something which is impossible. The main issue is what is the quality of fiscal adjustment and what will be the impact on wider economy? There are some expenditure cuts which would have limited impact on growth and possibly that is where the government would want to start by prioritising the expenditure cuts.

Also, there are some sectors where there is already a slow pace of implementation of ongoing projects and the award of new projects has been slower than expected and therefore the outgo in this fiscal would be lower than what was budgeted at the beginning of the year. So, in that sense this lower outgo would reflect a slowdown in growth momentum that has already taken place and not something that is going to further have a restriction on growth momentum.

However, at the same time if productive expenditure is being restricted and either there are cuts or there is deferral of expenditure from one year to the next then that is something that might have a wider impact in terms of straining the liquidity of corporates or the cash flows of the SME sector and maybe also have a little bit of a knock on effect on the asset quality of banks.