Fresh strain on India's fiscal balances under watch

Over the weekend, the government approved a special 'One Rank One Pension' (OROP) scheme for retired armed personnel. Indications are that the scheme will be backdated to July 2014 and will involve annual disbursements to the tune of INR 80-120bn. This implies about 0.1-0.15% of GDP impact in FY15/16, including arrears, with the likelihood that the outgo might increase over the mediumterm. When put together with a) recent increase in capital infusion towards banks to INR 120bn (0.1% of GDP vs 0.06% allocated), b) weak divestment proceeds; c) 70% of the deficit already reached in first four months of the fiscal year, this year's deficit target at -3.9% of GDP is at risk. 

That said, the authorities have some wiggle room within the existing budget. Fuel subsidy outgo was halved in FY15/16 and with global crude prices hovering below officially assumed levels, some savings could be carved out of the budgeted 0.2% of GDP.

On the revenues end, direct tax collections have been subdued, but indirect tax receipts are up 36% in first four months of the fiscal year. Further, a sharp increase in dividends and profits transferred by the central bank and other state-owned institutions, as part of non-tax receipts will also be handy in bridging the fiscal gap.

Overall, the government is likely to tread a fine line on the fiscal math in the coming months. Given the government's emphasis on keeping fiscal consolidation on track, in case targets come under pressure, a routine round of expenditure cuts in the final quarter should be expected to stay within the -3.9% of GDP red line.

This also suggests that the planned boost to capital expenditure might fall short of expectations and in turn limit the positive boost to growth prospects.