India fiscal deficit surges by 8.3% in April-May

Effective counter-cyclical policy changes may be too late now.

According to Morgan Stanley, the actual central government accounts data for April-May 2012 indicate that the fiscal deficit grew by 8.3% YoY compared with the budget estimate of 0.8% (for the full year). 

Here's more from Morgan Stanley:

We believe that the growth environment will remain challenging with no room for effective counter-cyclical policy stimulus. We think monetary policy will be less effective in dealing with the effects of a stagflation-type environment.

We believe that for an effective reduction in the cost of capital, the optimal outcome would be a reduction in public expenditure which helps to reduce consumption; increase savings and thus lowers current account deficit and inflation pressures. The actual central government accounts data for April-May 2012 indicate that the fiscal deficit grew by 8.3% YoY compared with the budget estimate of 0.8% for the full year.

We believe that a sizeable reduction in fiscal deficit in an environment when tax revenue growth is slowing will be a difficult task in the current political environment.