The government was able to better its own target for containing fiscal and revenue deficit targets for 2014-15, as per a data note by the finance ministry.
The fiscal deficit target for the government stood at Rs 5,01,880 crore or 4 per cent of gross domestic product (GDP) for the year ended March 31, better than the 4.1 per cent of revised target that the government had set for itself in the Union Budget. The government was also able to control the revenue deficit at 2.8 per cent, compared to 3.2 per cent in the previous fiscal.
A VCCircle poll conducted prior to the Budget in February showed that economists were confident of the government achieving the 4.1 per cent target given the divestment in Coal India and telecom spectrum sale. Although bulk of the money from the spectrum auction would flow over the years, the exchequer received an upfront payment of Rs 10,808 crore from the telcos for the spectrum.
The FinMin report highlighted that gross tax collections at Rs 12,45,037 crore grew 9 per cent as compared to 2013-14 and accounted for 9.8 per cent of the GDP.
Though the government has been able to achieve the fiscal deficit target there have been questions about the quality of fiscal adjustment as tax collections have been low due to weak corporate growth.
The government had revised the fiscal deficit targets for the coming years and is now aiming to bring it down to 3.9 per cent of GDP in the current fiscal, then to 3.5 per cent in 2016-17 and further to 3 per cent by 2017-18.
The disinvestment target for the current year stands at Rs 69,500 crore (0.6 per cent of GDP) which could mark a sharp 60 per cent jump over the Rs 43,439 crore it managed in 2014-15.
Rate cuts and ratings upgrade
The low fiscal deficit numbers would help the government in boosting its image for a ratings upgrade. International rating agency Moody’s upgraded India’s outlook from stable to positive last month while maintaining the Baa3 rating for government securities. The achievement of last year and the commitment by the government to achieve the targets in the medium term may prompt rating agencies to revise Indian ratings further.
The containment of the fiscal deficit could make a compelling case for a rate cut by the Reserve Bank. With inflation in April at 4.85 per cent, well below the 6 per cent upper target set by the Indian central bank and industrial growth languishing in the country, RBI needs to cut rates to fuel credit growth in the economy.
The RBI had last slashed rates after the Union Budget given the assurance from the government to achieve its fiscal deficit target of 4.1 per cent. With the government bettering its target and banks passing on the rate cuts to consumers there is room for one more rate cut for the Reserve Bank.
The bank has delivered two rate cuts of 25 bps each this year and the stock market has priced in another rate cut when RBI meets next on June 2 for its bimonthly monetary policy review.