Pressure mounts on the fiscal as GDP estimates slip

The government's fiscal math may once again be under pressure with the latest official estimate pegging GDP growth at factor cost at a mere 5 per cent in 2012-13, as compared to 7.6 (+/- 0.25 percent) growth expected in the Union Budget 2012-13.

Meanwhile, the data released by the Central Statistics Office on Thursday also estimated GDP at market prices to grow a mere 13.1 per cent as against 15 per cent in the last fiscal.

"Key to note is that deficit ratios could see a deterioration as nominal GDP growth for FY13 is now at 11.7 per cent versus 14 per cent projected earlier. This puts the government's 5.3 per cent fiscal deficit target at risk," said Citi economist Rohini Malkani in a research note.

But more worryingly, GDP data raises questions about the government's ability to spend given its deteriorating fiscal health. Finance minister P Chidambaram has already given directions to reduce expenditure in the current fiscal and further cuts are expected in the Budget 2013-14 as well.

"In a downturn, it's difficult for the government to generate revenue. So fiscal pressure always reduces the government's ability to spend," said DK Joshi, chief economist at Crisil.

But the CSO data revealed that growth in public and private expenditure is likely to slow to a mere 4.1 per cent each in 2012-13 as against near 8 per cent growth in the past six fiscals. While both gross and fixed capital formation is expected to grow by 3.9 per cent and 5.1 per cent respectively, it is much lower than the near double digit levels seen between 2006-07 and 2010-11.

"The numbers need to be taken with a pinch of salt but they do highlight the weaknesses in the economy — slowing private consumption and investments," Joshi said, adding that the rise in inventories points to higher capacity utilisation rather than new investments. Capital investment is expected to slow down to an annual 2.48 per cent in 2012-13 from 4.4 per cent in the previous year.

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