Fact check: How will Jaitley reach 4.1% fiscal deficit?

Moneycontrol Bureau

India faces a "major challenge" in achieving its fiscal year 2014-15 deficit target but meeting it is doable, recently-appointed chief economic advisor to the government Arvind Subramanian has said today.

The CEA was speaking after the government released the mid year economic review today in which it reiterated its commitment in meeting the target.

The fiscal balance is the gap between the government's annual revenues and expenditure, in the Union Budget he presented on July 10 this year, finance minister Arun Jaitley said the government would this fiscal incur a deficit of Rs 5.31 lakh crore (expenses of Rs 17.94 lakh crore and revenues of Rs 12.63 lakh crore), or 4.1 percent of the country's expected overall gross domestic product at the end of the year.

However, a look at the state of the government's finances show that the FM meeting the fiscal target is highly daunting.

The government has had two major disappointments, in the form of weak proceeds from divestment as well as low tax collection.

For the full year, the government had projected tax receipts at Rs 9.77 lakh crore, a growth of 20 percent from last year. However, in the first seven months of the fiscal year (April-October), it has raised only Rs 3.69 lakh crore, or 38 percent of the target.

While tax collections are often back-ended and much of the proceeds do come in towards the closing of the year, at this rate, it is virtually impossible for the government to meet its tax revenue mop-up target.

In fact, the government's first mistake was laying out such an ambitious tax growth target. In an economy expected to grow 5.5 percent, and including 7 percent average inflation, brings the nominal GDP growth at 12.5 percent.

Assuming tax collections to increase 20 percent when the actual economy is slated grow 12.5 percent is virtually impossible in a weak year (tax collections have outperformed GDP growth rate in strong years).

It must be pointed out that the rather ambitious 20 percent tax growth target was first laid out by P Chidambaram in the February interim budget and Jaitley merely chose to continue with it.

The bigger disappointment has been from divestment front. Even in face of the UPA's dismal record on share sales (it has missed its divestment target in each of the past five years), Jaitley laid out a Rs 58,000 crore target, through stake sales in state-run (ONGC, Coal India, NHPC) and formerly state-run firms (Hindustan Zinc, Balco).

But three and a half months to go for the fiscal year to end, so far it has raised a paltry Rs 1,700 crore through a divestment issue in SAIL.

The government would indeed make up some of it through savings it will achieve on subsidies: Rs 15,000 crore due to the late rollout of the Food Security Program (overall subsidy at Rs 1.15 lakh crore) and another Rs 12,000 crore from the fall in crude prices (total fuel subsidy was targeted at Rs 63,427 crore).

But even these will not be able to offset the shortfall in tax revenues and divestment proceeds.

One option could be the government embarks on a strict austerity drive, and cuts down on expenses in a hawk-like manner. It must be remembered even Chidambaram had faced exactly the same predicament last year as Jaitley is today, with the fiscal deficit reaching 90 percent in the first seven months.

But Chidambaram went after plan expenditure (largely made up of state and central level schemes) in a major way even as cutting plan expenditure can impact growth, a step FM Jaitley has not been a fan of.

Cutting non plan expenditure (comprising of spending on subsidies, defence and salaries, etc) can be prove to be difficult and unpopular.

Amid this, it remains to be seen how the FM pulls a rabbit out of his hat.

Some analysts are of the belief that, given the difficulties, even the market will not mind if Jaitley misses the fiscal deficit target.

"The market has priced in weakness in that position [4.1 percent deficit]," Prakash Diwan, director at Altamount Capital told CNBC-TV18 today .