The Central Government is set breach the fiscal deficit target yet again by 40 bps for 2018-19, and raise the target to 3.5 per cent for next fiscal in the forthcoming budget that may be skewed towards the rural economy, says a foreign brokerage report.

In a note Friday, Bank of America Merrill Lynch, however, said the fiscal “risks are overdone”.

“We expect the government to target a fiscal deficit of 3.5 per cent for FY20, after ending FY19 at 3.7 percent, 0.40 per cent higher than the target,” the note said.

It can be noted that the Modi administration has not met the fiscal targets in all these years, barring in FY15 when it improved upon its own target by a tad, and missing it marginally in the rest of the years.

As of November, it has used up 115 per cent of its budgeted market borrowings amidst slowing GST collections and a poor show on the divestment side. Against the ₹80,000 crore budgeted target, it has achieved only around ₹15,000 crore so far.

The report, however, notes that government may not borrow more to the deficit will be funded by drawing down on government balances with the Reserve Bank of India (RBI) which as of March 2018 had stood at ₹1.675 trillion.

The net government borrowing may come in at ₹5.07 trillion for FY20, it estimated.

It can be noted that even in the face of the budgeted target being overshot, the government has been repeatedly stressing on meeting the FY19 target of 3.3 per cent.

The brokerage said even though the 3.5 per cent target is higher than the target, it is still below the medium-term average of 4.3 per cent.

Seeking to allay concerns on inflationary impact of the fiscal gap being breached, it said, “Slippages of 0.25-0.50 per cent of Gross Domestic Product (GDP) at this level can hardly be inflationary given the slack capacity in the economy.”

It said providing the adequate liquidity support is more important than meeting the fiscal deficit targets and pitched for a $26 billion of government bond buybacks by the Reserve Bank of India (RBI) in FY20.

At the February 1 budget, the final one before the general elections, the government will try to address rural distress by interest subvention/direct income transfers supporting consumption over investment, it said.

“The budget should ideally not propose any new direct taxes, and the finance minister should take steps to alleviate stress in the hinterlands,” it said.

It estimates a support of ₹30,000 crore in interest subvention by waiving off the 4 per cent interest paid by farmers who repay on time and also a ₹70,000 crore commitment as income support to farmers.

Related Topics