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Fiscal fantasy

Don’t be surprised if the deficit overshoots the target by a mile — the Budget not only overstates revenue, it also understates expenditure 

The emperor has no clothes’ or something to that effect should have been the headline post FY13 Budget day. Instead, along with the usual eulogies and clichés from industry, the newspapers also celebrated the landmark of 100 centuries. Never mind the fact that someone claiming not to play for the record books thought it right to take guard against a minnow and then crawled to reach it. Sure, your critics didn’t teach you your cricket, but neither did they go around asking for a duty waiver on a gifted Ferrari only to sell it later. Right, if we were to believe everything that is printed of late, then I am J P Morgan. But then, this is not about the legendary financier, nor is it a tirade against our collective hypocrisy. This is about the unrealistic fiscal deficit projected by finance minister Pranab Mukherjee in the FY13 Budget. 

Either way you look at it, the FY13 fiscal deficit target is a sure miss. This is because it hopes for a best case scenario. Rajeev Malik, senior economist, CLSA, says the actual deficit will be 5.5% rather than the government’s target of 5.1%. For starters, the Budget assumes a real GDP growth of 7.6% whereas brokerages like CLSA and IIFL have a 6.3% and 6-6.5% estimate, respectively. That is only the beginning of a long disagreement on how FY13 might actually play out in terms of tax collections and subsidy reduction. H Nemkumar, head, institutional equities, IIFL, believes reform driven growth acceleration is now in doubt and the much required revival in investment cycle may be further delayed. 

H Nemkumar, IIFLWhile everyone else is fretting about how the increasing fiscal deficit and ensuing liquidity squeeze could derail growth, there is a lone contrarian voice that should bring some solace to the FM. Shankar Sharma, co-founder, First Global, damns the hullabaloo, “Fiscal deficit is an incorrect and insufficient measure to look at a country’s macro picture. Debt as a percentage of GDP is what matters and on that count India is much better placed.” As proof, he point


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