'Chidambaram may positively surprise markets on deficit front'

Higher-than-expected non-tax revenue and expenditure cuts may help peg fiscal deficit target below the projected 4.8 per cent in the current fiscal, and project the revenue-expenditure gap next fiscal at 4.2 per cent of GDP, says a report.

"We expect Finance Minister P Chidambaram to meet the fiscal deficit target of 4.8 per cent of GDP for FY14, which he has defined as the 'red-line'," Standard Chartered said in a report today.

"We even see a possibility that the finance minister will positively surprise the market by announcing a deficit below 4.8 per cent," it added.

Standard Chartered has also projected the FY15 gross market borrowing at Rs 5.8-6 trillion or 4.2 percent of GDP.

The report also said the government will end the current fiscal with a cash surplus of about Rs 1 trillion, despite the cancellation of the Rs 15,000 crore G-sec auction, as national small savings fund collection had exceeded the budgeted amount by Rs 36,100 crore as of end December.

The report said that non-tax revenues, including disinvestment proceeds, could surprise on the upside as dividend flows from state-run enterprises have been higher than anticipated.

"We expect the government to end FY14 with dividend/ profit collection of 0.85 per cent of GDP, exceeding its target of 0.65 per cent," the report said.

The ongoing spectrum auctions are likely to yield enough revenues to meet the budgeted proceeds, the report said. Already on the ninth day of the auctions, the government is assured of close to Rs 62,000 crore in bid amounts.

The report expects the government to trim expenditure by 0.55 per cent of GDP to meet the fiscal deficit target.

In the run-up to the general elections, Chidambaram will present the vote-on-account next Monday.

The market participants will closely watch the FY15 fiscal deficit target, which will determine the size of market borrowing for the next fiscal year, according to the report.

"The target is widely expected to be set at 4.2 per cent of GDP, in line with the fiscal consolidation plan outlined in October 2012," according to the report.

The report said since the finance minister was committed at that time to reducing the fiscal deficit by 0.6 per cent of GDP annually, he is unlikely to deviate from this plan in his final Budget.

"However, the new government will have the option of revisiting the deficit target and borrowing plans for FY15. This means the borrowing laid out in the interim budget will be valid only for Q1 of FY15, if the new government revises the FY15 fiscal deficit projections," the report said.

On the GDP growth for the next fiscal, the report expects the government to assume nominal GDP growth for FY15 at 12 per cent.

"We expect the government to project 15.3 per cent growth in tax revenue in FY15. In line with the expected trend in FY14, most of the increase is likely to come from robust income tax and services tax collections," the report said.

The government is likely to project combined tax and non-tax revenue collection at equivalent to 9.7 per cent of GDP for FY15, marginally better than 9.3 per cent of GDP we expect in FY14, it said.

To meet its likely goal of narrowing the fiscal deficit by 0.6 per cent of GDP in the next fiscal year, the government will have to cut spending by at least another 0.3 per cent of GDP in FY15, the report said.

Meanwhile, a UN report earlier in the day said the government is unlikely to meet fiscal deficit of 4.8 per cent due to low growth and higher subsidy.

"Given the weak growth momentum in the region and the difficulties in raising tax revenues and curbing expenditure growth, fiscal deficits will remain substantial in the near term," said the UN report titled 'World economic situation and prospects for 2014'.

"The government is unlikely to meet its target of reducing the deficit to 4.8 per cent in the current fiscal since growth is below projections and the depreciation of the rupee pushes up the subsidy bill," it said.