Meeting fiscal deficit target a challenge, says FinMin report

The Finance Ministry’s Mid-Year Economic Analysis has stated that meeting the 4.1 per cent fiscal deficit target for 2014-15 is a “major challenge”.

However, the Centre said it was “committed” to achieving the target despite challenges such as weaker economic growth and lower-than-anticipated revenue collections so far this fiscal year.

“The overall economic outlook has improved (in recent weeks). We are committed to achieving the 4.1 per cent fiscal deficit target despite unusual challenging circumstances,” Arvind Subramanian, Chief Economic Advisor, told the media on Friday after Finance Minister Arun Jaitley had tabled the

The Government is betting big on a pick-up in economic activity in the second half of this fiscal year. “This is critical to prevent a slippage and to meet the overall fiscal deficit target during 2014-15,” says the report.

The report has forecast a GDP growth of 5.5 per cent for fiscal year 2014-15.

Subramanian also said it was now imperative to consider the case for reviving public investment as one of the key engines of growth. This is not to replace private investment, but to revive and complement it, he added.

The senior Finance Ministry official also said that the PPP (public-private-partnership)) model has been less than successful.

Subramanian also said the declining trend in inflation will continue, while not ruling out the possibility of a surprise increase in the next few months.

The mid-year analysis has projected an average retail inflation (based on the consumer price index)of 5.3 per cent for the January-March 2015 quarter, 5.4 per cent in April-June and 5.8 per cent in January-March 2016.

On non-performing assets (NPAs), the report does not see the situation as alarming. Although there are serious concerns about the deterioration of asset (or loan) quality, some comfort has been provided by the relatively strong capital adequacy of banks, says the report.

This may ensure the banking system remains resilient even in the unlikely contingency of having to absorb the existing stock of NPAs, it added.

At the same time, the gross non-performing assets (GNPA) position of the Indian banking system compares favourably with developed and developing economies.

For example, the share of GNPAs in total advances stands at 3.2 per cent in the US, 2.9 per cent in Germany, 8.2 per cent in Spain, and 5.1 per cent in Italy. Among the emerging economies, in Brazil GNPAs were at 2.9 per cent of total assets and in Russia, at 6 per cent.

For India, the studies conducted by the RBI suggest that under the baseline scenario, the GNPA ratio is expected to be around 4.1 per cent of total advances in fiscal year 2014-15.

However, if macroeconomic conditions deteriorate, the GNPA ratio may increase to around 4.5 per cent under a medium stress scenario and 5.1 per cent under severe stress, by March 2015, the report said.