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India's Q1 fiscal deficit jumps as slowdown bites

Three months into the current financial year, India's fiscal deficit was already more than a third of the full year target, data released on Tuesday showed, and analysts saw little scope for a reversal of the trend because of poor revenue collection in an economic slowdown.

Data released on a government website showed the April-June fiscal deficit at Rs 421.98 billion or 36.3 per cent of the target for the 2001-02 financial year.

This is sharply higher than the same period last year when the fiscal deficit was 22.5 per cent of the target for 2000-01.

"This is mainly because of a shortfall in tax revenues due to the sluggish economy," said Ajit Ranade, chief economist, India, at ABN Amro Bank.

Net tax revenues for the quarter were Rs 168.35 billion, or only 10.5 per cent of the target for the year, far from the 15.4 per cent achieved in the same period last year.

The numbers reflect a sharp slowdown in economic activity.

Gross domestic product growth fell sharply to 5.2 per cent in 2000-01 from 6.4 per cent and 6.6 per cent in the two preceding years.

Industrial output growth slipped to 1.9 per cent year-on-year in May from 6.0 per cent a year earlier on the back of poor demand.

Exports grew at 5.1 per cent in April-May this year, in sharp contrast to nearly 20 per cent growth in 2000/01.

Analysts saw little scope for a pick-up in revenue collection, saying the economy was unlikely to turn around in the near future given poor local demand and a global slowdown.

That suggests a fresh overshoot in the fiscal deficit target, which is pegged at 4.7 per cent of GDP for 2001-02.

Any overshoot would dampen the already faint hopes of global rating agencies improving India's sovereign rating from its current junk bond status.

India exceeded its 2000-01 fiscal deficit target of 5.1 per cent of GDP, finishing the year with a deficit of 5.2 per cent on the back of lower-than-targeted revenues.

Lower revenues to continue

The government is pinning its hopes on an increase in local demand, following a good monsoon which is expected to improve rural incomes.

With roughly two thirds of India's billion-plus population dependent on agriculture and related activities, the monsoon rains are a critical driver of demand and economic growth.

"The impact of a good harvest is likely to impact industrial growth after October. The better part of the year would be over by then," said B Bhattacharya, economist with the Institute of Economic Growth.

The government has also announced plans to pump-prime the economy , but analysts are sceptical of its ability to do so, given its current financial state and warn that any such move could result in an overshoot of the fiscal deficit.

Ranade estimated the fiscal deficit for the year at 5.1 per cent of GDP.

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