India Insight:Higher government spending stretches fiscal deficit YTD

Fiscal deficit reached 106% of the government’s budget estimate (BE)during Apr-Jan 2017 (FYTD): Accordingly, the cumulative fiscal deficit hasreached 3.7% of GDP FYTD. We believe the government will be able to meetits target of 3.5% of GDP for the full year FY17 building in higher receipts fromtax collections, dividends and divestments and at the same time curtailing itsspending in the months of February and March 2017. It needs to be noted thatmore than one-third of gross tax revenue collections accrue in the Marchquarter. We maintain our view that the impact of demonetisation will be largelyneutral on government finances in FY17. While some tax buoyancy isexpected on higher tax compliance and income declaration, this is likely to beoffset by a temporary slowdown in economic activity expected in the Dec-16and Mar-17 quarters thus adversely impacting gross tax collections.

Gross tax revenue collections ahead of target on FYTD basis: The growthin central government's gross tax collections picked up to 12%YoY in Jan (vs.

+5%YoY in the previous month). Indeed, it remained strong at 18%YoY FYTD(vs. RE of 17%YoY). Taking into account assignment to states, net taxcollection was up 20%YoY FYTD (well above RE of 15%YoY).