FM's deficit math is going wrong; rate cut hopes recede

Despite Finance Minister Pranab Mukherjee’s assurances that his targets for the fiscal deficit are not unduly ambitious, economists are now betting on the fact that given fuel subsidy slippages and revenue estimates not holding up, the 2012-13 (FY13) deficit level could be higher by about 40 basis points, and end up at 5.5 percent of GDP.

[caption id=“attachment_253704” align=“alignleft” width=“380” caption=“The finance ministry will be hoping that this time round, RBI governor Duvvuri Subbarao will oblige at least with a modest cut in rates. PTI”]  [/caption]

Mukherjee has estimated a 5.1 percent deficit level, riding on the back of cutting down on non-essential subsidies, generating revenues and 7.6 percent economic growth.

Given the generally disappointing budget which saw none of the Big Bang reform measures some had hoped for, many are now reducing their rate cut assessment quantums from the earlier 100 basis points to about 50-75 basis points for 2012 (100 basis points make 1 percent). This is because the general feeling is the Reserve Bank of India (RBI) may not be very enthused about the fiscal consolidation moves attempted in the budget and with oil prices shooting up, fuel subsidy levels remain a concern.

More from Economy

Budget 2024: These are the many hopes and aspirations of India's social development sector Is the United States in recession? Signs to watch out for

A report in The Economic Times on Friday also points to several institutions tempering rate cut estimates for the 17 April RBI Policy. The report mentions Nomura, Kotak Mahindra and Standard Chartered among others as doing so.

In a report, Citi’s Rohini Malkani also says: “We are revising our rate call reduction for 2012 from 100 bps to 50-75 bps.” Malkani says this is because of higher oil prices and suppressed inflation, currency depreciation, fiscal slippages and price pressures at the retail level and the likelihood of “less than expected fiscal consolidation in FY13”.

The weak growth numbers of the third quarter of FY12, where the reading was a modest 6.1 percent, has also added to the worries and led to economists reducing rate cut estimates for the year. The growth number for the third quarter is the weakest in three years. However, Citi, for instance, has maintained a 7 percent GDP estimate for FY13 banking on the recent steps on the infrastructure front which, it says, are positive and “bodes well for the investment cycle recovering in the second half of FY13.”

Citi also pegs the rupee at around 50 levels and reckons it will oscillate around that level for the next 12 months. Oil trending higher, it says, could upset that estimate.

The key, of course, will lie in the extent RBI sees the fiscal estimates of the finance minister as being realistic. Besides, oil could play a serious spoilsport. Some evidence of the RBI’s thinking is already being seen in RBI Deputy Governor Subir Gokarn’s comment that the rising oil prices are not a ‘happy situation’.

The finance ministry, however, will be hoping that this time round, RBI governor Duvvuri Subbarao will oblige at least with a modest cut in rates to signal the central bank’s faith in the efforts of the government on the fiscal consolidation front.

As reported by Firstpost earlier, whether the government will bite the bullet on fuel prices - and by how much - given the political realities it faces, will also go a long way in determining RBI’s policy stance in April. Watch this space.