India's twin deficits, current account and fiscal imbalances are heading for better times. Modest increase in the FY15/16 fiscal deficit to -3.9% of GDP from -3.6% should improve the credibility of the fiscal math.
Several changes in the direct and indirect tax changes are on the cards, including a gradual reduction in corporate tax rates from FY17 onwards. Increase in the service taxes and custom duties, alongside plans to introduce GST next year should buttress collections. The government affirmed its commitment to fiscal consolidation, by setting the FY17 target at -3.5% of GDP and -3% by FY18. Renewed focus on higher public spending especially infrastructure projects is positive for growth.
The rating agencies and markets will however continue to take a sober view toward any hypothetical upgrade and monitor the fiscal targets and whether they are met over the medium-term. S&P echoed these sentiments on Monday, saying that they do not expect the rating to go up over the next year. Adding there was need for the economy to strengthen at least two of the metrics on growth, inflation and fiscal balance, said DBS Bank in its report.
On the other hand, current account deficit is expected to benefit from low commodity prices and correction in gold purchases. The deficit widened in 1H FY14/15 (i.e. in Apr-Sep14) to 1.9% of GDP, from 0.6% in the prior six months. There is likely to be little relief in the Dec14 quarter, as the average monthly trade deficit jumped by 15% in Oct-Dec vs 1H. Higher gold imports and rise in non-oil non-gold purchases offset the beneficial impact from lower oil imports until late-2014, it added.
But the oil import bill began to narrow December onwards, just as gold purchases also moderated after the seasonal jump. This will likely extend into the Mar quarter and narrow the current account deficit to -1.3% of GDP. Low oil prices will be an important driver for the scale of improvement in next year’s deficit.
"We look for -1% of GDP in FY15/16 assuming a rebound in prices, but the deficit could halve in scale if oil prices stay close to USD 60pb," it opined.
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