Nomura sees the Indian government lower spending by 0.6% of GDP over the next four months to meet the fiscal deficit target
The current run rate on the fiscal deficit leaves no space for slippage in the remaining four months of the fiscal year. It is estimated that the government will have to cut spending by 0.6% of GDP over the next four months to meet its deficit target. This is the austerity forecast for the Indian government from Nomura analysts in a research note.
Nomura expects overall revenues to fall short by Rs720bn (0.6% of GDP) in FY14 from weak growth causing net tax revenues to grow at only 10% year-on-year in FY14 (government's target: 19%), and a shortfall on disinvestment, which is unlikely to be completely offset by higher dividends.
According to Nomura, lower government spending and weak investment demand contribute to the view that GDP growth will remain in the 4.5%-5.0% range until Q2 2014.
The trends in government spending are shown in the chart below:
Nomura warns that these cuts having two key implications. First, a rising government cash balance will tighten banking system liquidity in Q1 2014. Second, growth in government spending should slow to 5.6% y-o-y in Dec-Mar from 17.7% in April-November, which will likely hurt growth. With a short-run (1-year) fiscal multiplier1 of 0.55, spending cuts worth 0.6% of GDP would lower GDP growth by 0.3% during this period.
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