India’s fiscal deficit could reach 5.6% of GDP in 2012/13

NEW DELHI: India’s fiscal deficit could miss the revised official target and swell to as much as 5.6 percent of GDP, a top government official said, making it tougher for the government to avoid a credit rating downgrade.
The comments were the gloomiest scenario for public finances yet given by the government and follow a failed auction of mobile phone spectrum recently that dashed its income forecasts.
Global rating agencies have threatened to downgrade India’s sovereign credit rating to junk if it fails to rein in its deficit, which is ballooning because of higher spending on food, fuel and fertilizer subsidies and poor tax receipts.
Just last month, Finance Minister P. Chidambaram raised the fiscal deficit target to 5.3 percent of GDP for the current financial year to end-March 2013 from a previous target of 5.1 percent.
“Looking at the current trends in revenue and expenditure, 5.3 percent looks tough,” said the official, who has direct knowledge of the government finances.
“There could be a shortfall of about 500 billion rupees ($ 9.1 billion) in revenue receipts,” the official said, explaining that would add 0.5 percentage points to the original 5.1 percent target.
A second official agreed with that assessment. Both officials declined to be identified citing the sensitive nature of the information.
In setting the revised 5.3 percent deficit target, the government was banking heavily on generating billions of dollars from the auction of second-generation (2G) mobile phone licences. But the auction last week yielded just under 25 percent of the targeted 400 billion rupees ($ 7.2 billion).
The government plans to have an auction of still-unsold telecom spectrum before March. But the first official said even with that auction, the government could at best garner only 200 billion rupees for the full fiscal year.
That could force the government to borrow an additional 400 billion rupees from the market, the official said, in the most negative borrowing scenario the government has yet given.
Private economists polled by Reuters earlier this month had estimated the government would need to borrow this amount, but only if the deficit hit 5.8 percent. Heavy government borrowing is seen as a drag on economic growth, because it drives up borrowing costs for private investors.
After the auction last week, Chidamabaram said he was still confident India could hit the 5.3 percent deficit target.
India’s federal bond yields rose on the Reuters report. The benchmark 10-year bond yield rose to as high as 8.23 percent, up 3 basis points from levels before the news. The yield was last trading at 8.22 percent compared to its 8.21 percent close on Wednesday.
New Delhi is on track to borrow 5.7 trillion rupees, or 5.6 percent of GDP, by February. Every 0.1 percentage point increase in the deficit is estimated to result in an additional market borrowing of at least 100 billion rupees.
The Indian rupee weakened for a third straight session yesterday as persistent dollar buying by oil refiners and absence of major dollar inflows due to a holiday in the US hurt the local unit.
“Personally, I continue to run moderately short USD positions even at this stage. I do not agree to the consensus of 56-57 levels on the pair and think the rupee can appreciate hereon with a second round of capital inflows,” said Samir Lodha, managing director at QuantArt Market Solutions.
The partially convertible rupee closed at 55.21/22 per dollar versus its previous close of 55.11/12.
Traders estimated about $ 200 million worth of dollar demand, which they attributed to Cipla, after the drug maker said it would offer $ 215 million for a majority stake in South Africa’s Cipla Medpro.
The absence of major flows due to the Thanksgiving holiday in the US also weighted on the rupee.
Dealers expect the pair to move in a 54.50 to 55.50 range in the immediate future, pending developments at the winter session of parliament.
“The winter session will be key. The rally seen in the rupee post the reforms announcement was short-lived, but even a small negative is hurting the rupee,” a senior dealer with a state-run bank said. The dealer predicted the rupee to remain in a 54.80 to 56 range, and head above 56 by year-end.
In the offshore non-deliverable forward market, one-month contract was at 55.51, while the three-month was at 56.09.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 55.25 with a total traded volume of $ 4.3 billion.