India Insight:Government spending picks up in June quarter

Fiscal deficit reached 61% of the government’s Budget estimate (BE)during April-June 2016 (FYTD): This compares with 52% registered in April-June 2015. The cumulative fiscal deficit has reached 2.2% of GDP FYTD (vs.the budget estimate of 3.5% of GDP for FY17).

Revenue spending up, capex spending down in June quarter: Thereseems to be frontloading of government spending in view of double digitgrowth seen in total expenditure at +19% YoY in June quarter (above the BEof +11.5%YoY for FY17). Looking at the breakup, revenue expenditure growthremained strong at +24%YoY FYTD (above BE of 12.5% for FY17). Capitalexpenditure, on the other hand, declined by 16%YoY in June quarter (belowthe BE of +5%YoY). The increase in spending in June quarter was largely ledby higher allocation towards food subsidies, interest payments and ministry ofrural development.

Gross revenue collection remains strong in June quarter: The centralgovernment's gross tax collections grew 31%YoY FYTD (well above the BE of12%YoY). Taking into account assignment to states, net tax collection was up55%YoY FYTD, well above BE of 12%YoY.

The growth in direct tax collections remained strong at 27%YoY FYTD(above BE of 14%YoY) largely led by higher personal income taxcollections (+53%YoYFYTD vs. BE of 23% for full year) on advance taxpayments. The corporate tax collections, on the other hand, laggedregistering growth of 4%YoY in the June quarter vs. BE of 9%.

Indirect tax collections grew 37%YoY FYTD (vs. the BE of +10%) largelyled by higher excise duty collections even as customs and service taxcollections remained upbeat. This is party on account of benefit offrequent hikes in excise duty on gasoline and diesel (announced late lastyear) flowing in, revisions in service tax rate and increase in global crudeoil prices.

Outlook

Government likely to achieve FY17 fiscal deficit target of 3.5% of GDPbut it is the quality and not level of deficit which is key: We expect thecentral government to be able to achieve the fiscal deficit target of 3.5% ofGDP in FY17 despite the higher payouts involved on account of paycommission awards and OROP (One Rank One Pension) scheme anddependence on one-off receipts including divestments (dependent on capitalmarkets condition) and spectrum auctions. However, we believe it is thequality of government expenditure which is key to have a durable impact oneconomy - while government’s revenue expenditure will provide a short-termfillip to economic activity, it is the capital outlays that tend to have a lastingpositive multiplier impact on overall growth. We believe the government needsto focus on improving the quality of fiscal consolidation by fast-tracking theintroduction of the goods and services tax (GST) in the ongoing parliamentarysession and taking measures to reduce unproductive expenditure includingfood and fertilizer subsidy.