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India unlikely to meet deficit target: Analysts

A little over a month into the new financial year, analysts are already convinced India will not meet its fiscal deficit target.

A weakening economy will blow a hole in revenue estimates and tax breaks in this year's budget will not help either -- although interest rates are unlikely to rise as activity slows.

"Take the economic slowdown, the removal of the tax surcharges and last year's tax collection numbers and it looks like the government has made some very aggressive projections," said M R Madhavan, research head at Bank of America in Bombay.

In the 2001-02 (April-March) Budget, released in February, the budget deficit was forecast at 4.7 per cent of gross domestic product.

The difficulty in meeting that target -- India has not met its budget forecast since 1990 -- was highlighted on Wednesday when the government revised its 2000/01 deficit target to "closer to 5.3 per cent" of GDP from 5.1 per cent, due to a shortfall in tax receipts of more than Rs 80 billion ($1.7 billion).

For the current fiscal year, the government has budgeted net tax collections of Rs 1630.31 billion, a 12.9 per cent rise over the previous year's revised estimates.

Analysts say this is a tall order, given that it has lowered its tax estimates for 2000-01 when tax rates were higher.

The government removed surcharges of 15 per cent on income tax paid by individuals and companies in the Budget for this year.

"The tax numbers projected were too optimistic given the economic slowdown," said Pradeep Srivastava, a senior economist at the National Council for Applied Economic Research.

UNCERTAIN GROWTH OUTLOOK

The Indian economy, one of the world's fastest growing over the last decade, grew 6.4 per cent in 1999-2000, down from 6.6 per cent a year earlier.

In 2000-01 growth is expected to have eased further to six per cent. While there is no official forecast for 2001/02, officials have said they expect it to be around 6.0-6.5 per cent.

A slew of recent data releases suggest there is little hope for an immediate turnaround and some analysts have already warned that the global economic slowdown and signs of drought in some Indian states could keep growth sluggish in the near term.

Analysts are also sceptical whether the government will be able to raise the Rs 120 billion it has targeted through sales of its stakes in state-run firms this year, a crucial factor in fiscal deficit calculations.

Since the divestment programme began a decade ago, the government has been able to raise only slightly above 40 per cent of its target due to a combination of uncertain capital markets, and stiff political and labour opposition.

INTEREST RATES SEEN STABLE

But despite the pessimism on the deficit forecast, analysts do not expect interest rates to rise as most economic factors underline the need for a stable rate environment.

Inflation has stabilised after a spike to eight-year highs earlier this year, money market liquidity is comfortable and is expected to remain so and sluggish economic activity calls out for pump priming through lower rates.

One factor which could drive up interest rates is currency volatility, but analysts are hopeful of rupee stability this year as foreign capital inflows have been good and are expected to continue and global oil prices look more stable than last year.

A surge in foreign fund inflows into Indian stock and debt markets and heavy government spending last month have combined to boost cash with banks, which currently have few opportunities to deploy their funds in a sputtering economy.

Foreign funds have pumped $2.17 billion in Indian debt and shares since January against $1.56 billion in the whole of 2000.

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