Govt may opt for wider fiscal deficit target of 3.2% in Budget 2018: DBS

January 04
18:49 2018

A fiscal slippage in FY18 will likely result in the government opting to go for a wider gap for 2018-19 in the upcoming budget, foreign lender DBS said today.

The fiscal deficit number for 2017-18 will come at 3.5 per cent as against the targeted 3.2 per cent of the GDP and it will result in the government opting to settle for a target of 3.2-3.3 per cent rather than the 3 per cent under the fiscal consolidation roadmap.

“The FY18 deficit might be pegged at 3.5 per cent of GDP (similar to FY17), which opens room for the FY19 target to be set at 3.2-3.3 per cent compared to the roadmaps 3 per cent,” Singaporean lender DBS said in a note.

It can be noted that the government has already exhausted 112 per cent of the 2017-18 target by November 2017, with four months to go. It also announced an additional borrowing of Rs 50,000 crore for FY18.

DBS attributed the difficulties on the fiscal math to the shortfall in receipts and added that the expenditure has stayed on the planned course.

It said the expenditure compression in the remainder of the fiscal will have to be aggressive if the 3.2 per cent target has to be met.

A higher fiscal deficit target for the next fiscal will result in a higher borrowing by the government, it said.

“Expectations are building for a populist budget, targeted at rural/ agricultural development, job creation, and effective implementation of social sector schemes,” it said.

Opting for a fiscal deficit target of 3.2-3.4 per cent will lead to a surge in Government borrowings to Rs 4.8-5.2 lakh crore, it said.

A wider deficit, which is generally seen as being inflationary in nature, will lead the Reserve Bank to settle for a long pause in its rates stance, it said, adding that factors like inflation “warrant attention”.

The headline inflation may go up to 5.2-5.4 per cent range in December, it said, adding that the price rise situation will not abate to the 4 per cent target set for RBI for the next six months.

The bond yields, which are rising lately, will move further and the benchmark will be trading at 7.5-8 per cent in the coming quarters, it said.

Related Articles