India’s fiscal position eases into August

India's cumulative fiscal deficit in first five months of FY15/16 scaled back on higher non-tax revenues support, while expenditure remained on track. Helped by a rare fiscal surplus in Aug, the Apr-Aug fiscal deficit accounted for 66.5% of the full year budgeted target, narrowing from ~70% last month and down from 75% in the comparable period year ago. On 12 month trailing basis, the fiscal deficit is tracking close to official targets. 

Spending outlays have reached 41% of this year's target, with both plan and non-plan disbursements staying on track. Bulk of the improvement stemmed from non-tax revenues, which jumped 43% YoY in Aug and has already accounted for two-thirds of the annual target. These collections were buoyed by a record jump in RBI's surplus transfers to the government, up 22% from year before. 

With other state-owned institutions expected to add to this kitty through the year and spectrum inflows, there will is sufficient pipeline support for non-tax receipts this year. Tax revenues meanwhile lagged at only a fourth of the annual budget seen by Aug, however the seasonality of these collections will help shore up the government's finances later in the year. 

While higher revenues are timely, the government faces higher spending commitments this year with the likely implementation of the pension scheme for armed personnel and additional funds for banks' capital infusion needs. Prima facie, these will put pressure on the government's finances but there is sufficient headroom within the budget. Savings from low commodity prices, higher indirect tax collections and dividends/ surpluses should help bridge the gap. 

In addition, given the government's emphasis on fiscal consolidation, risks of overshoot of targets will be mitigated by expenditure cuts to stay within the -3.9% of GDP red line. The Reserve Bank of India has also assumed that commitment to fiscal targets will help keep inflation and inflationary expectations in check.