Fiscal deficit slips marginally on lower growth estimate

But the fisc math could swing either way post the revision in growth figures

The 3.2-per-cent fiscal deficit target for FY18 has inched up, thanks to the CSO lowering the growth numbers for FY18 in its first advance estimate.

The blip was however, long expected, given the earlier aggressive forecast of 11.75 per cent growth in nominal GDP for FY18 which has now been revised down sharply to 9.5 per cent.

While the miss in fiscal deficit target is a marginal 4 basis points for now, it could be higher if growth estimates for the current fiscal are revised lower in the CSO’s second advance estimate due on February 28.

The CSO’s latest growth estimate implies real GDP growth to pick up from 6 per cent in the first half of FY18 to 7 per cent in the second half. While the transitory impact of demonetisation and GST should wane in the second half leading to higher growth, a substantial jump as expected by CSO may be unlikely.

However, the joker in the pack is the revision in growth estimates for earlier fiscals, which is due on January 31 just before the Union Budget. Remember, just within a few hours of the Finance Ministry putting out the Economic Survey last year, the CSO had come out with a new set of growth estimates, for FY16.

The sharp bump in growth for the FY16 fiscal, had in turn led to a marginal benefit in the fiscal deficit ratio for FY18!

Ifs and buts in H2 growth

The CSO’s GVA growth estimate for FY18 at 6.1 per cent is lower than the RBI’s forecast of 6.7 per cent. Nonetheless, the substantial pick up that the CSO has factored in for the second half of the current fiscal is riddled with some anomalies.

Manufacturing GVA is expected to pick up from 4 per cent in the first half to 5.1 per cent in the second half. To start with the sharp rebound in manufacturing from 1.2 per cent in Q1, to 7 per cent Q2, itself is unexplainable given that the underlying IIP trend. IIP growth numbers for September 2017, had shown that the activity turned weaker in larger number of manufacturing industries reporting sub-5 per cent growth.

After registering a positive 3.4 per cent growth in August, consumer durable IIP reported a fall of 4.8 per cent in September. Consumer durable IIP contracted by 6.9 per cent in October.

The mining sector which is expected to see a pick-up in the second half, according to CSO, had seen a sharp deterioration in October’s IIP figures.

Importantly, there is a stark difference in the CSO’s forecast for the second half between Public administration/defence/other services and Government Final Consumption Expenditure on the expenditure side.

While the former is expected to grow from 7.6 per cent in the first half to 11 per cent in the second half of FY18, the latter sees a slowdown from 10.2 per cent to 6.6 per cent. It is unclear how the two could move in opposite directions.

Tweaks here and there

While the CSO could likely temper its growth estimate for FY18 in February, some tinkering in the growth numbers for earlier fiscals, can swing the fisc number either ways.

CSO had bumped up the growth in real GDP from 7.6 per cent to 7.9 per cent for the FY16 fiscal, last year just before the Budget. This had led to a marginal benefit in the fiscal deficit ratio for FY18. It needs to be seen how much the CSO tinkers with the growth numbers in the coming months.

Of course, what matters more than the fiscal deficit ratio is the Centre’s gross market borrowing which was pegged at ₹5.8 lakh crore for FY18 in the last Budget.

But the Centre’s recent plan to borrow an additional ₹50,000 crore has already fuelled fears of fiscal slippage. The fiscal deficit already breached the full-year estimate — at 112 per cent up to November 2017.

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