Fiscal deficit for the first two months of FY16 at 37.5% of the full year target is a result of the government channelising higher spending towards capital expenditure to increase in productivity, says India Rating and Research (Ind-Ra). Government's planned expenditure on capital account for April-May rose 32.5% to Rs 183 billion and total planned and non-planned spending towards creating assets went up to Rs 377.4 billion. Higher planned expenditure indicates rising public investments in developmental projects. Evidence shows that such government expenditure also triggers private investment.
Fiscal deficit on an absolute basis was Rs 2.08 trillion for April-May 2015 and declined 13.3% yoy. Ind-Ra believes that the pace of expenditure towards creating assets needs to be maintained unlike in the last two years where the government cut down on planned spending in the third and fourth quarters to meet the targeted fiscal deficit.
Investment growth turned negative 0.3% in FY13 after averaging 11.3% during FY10-FY12. Although it recovered somewhat to 3.0% and 4.1% in FY14 and FY15, respectively, it is nowhere near the average investment growth of 16.3% witnessed in the three years prior to the global financial crisis of 2008.
Private investment and bank lending remain weak but government spending has picked up, looking at the projects being awarded by National Highways Authority of India ('AAA'; Outlook Stable). Expenditure on power is also increasing. The ratio of projects under implementation, which are stalled public projects, declined to 4% in March 2015 from 5% in June 2013. Also, the government has allowed National Highways Authority of India to provide funds to those stalled projects which are near completion. This will also provide support to road projects. Cabinet Committee on Economic Affairs approved road projects worth INR178bn during April-June 2015.
The period of high capex growth (FY04-FY08) coincided with a period of low leverage, and net leverage remained around 2.5x compared with the 4.7x FY15 median leverage of 500 highest borrowers. High leverage, low capacity utilisation and lack of finance will all mean limited capex by private corporates.
The government has managed to bring down the fiscal deficit as a percentage of GDP to 4.1% FY15 from 5.3% in FY13. GDP growth in the medium term may be higher than expected if the pace of capital expenditure is maintained for the rest of the year and beyond along with containing fiscal deficit at current levels .
Given the current conditions of banks with stressed loans (non performing plus restructured) rising to 11.1% and credit growth at sub 10%, the ability of private corporates to invest is limited. Thus, while bringing down the fiscal deficit is important for macroeconomic stability, accelerating growth is equally important. Ind-Ra believes that at the current juncture a marginal fiscal slippage by increasing capital expenditure should not be viewed adversely.
