Barclays expects the Centre’s latest set of fiscal measures aimed at reining in inflation to lead to widening of the fiscal deficit to 6.9 per cent of GDP from budgeted level of 6.4 per cent for FY23.
The recent measures — tax cuts on motor fuels, cooking gas subsidies and duty cuts on imports of raw materials and intermediaries of plastics, iron and steel — would cause overall fiscal deficit to likely exceed budgetary estimates by atleast ₹2-lakh crore, Barclays said in a research note. The tax cuts on motor fuels — ₹8 per litre on petrol and ₹6 per litre on diesel — are likely to cost the exchequer ₹1-lakh crore. The subsidy burden on cooking gas will likely remain closer to the ₹6,100 crore estimated by the government.
Barclays estimates an incremental fiscal shortfall of ₹4-lakh crore for the government and this could be partly offset by a revenue upside of atleast ₹1-lakh crore and government cutting capital expenditure by ₹1-lakh crore this year.
Not enough to stop RBI rate hikes
Barclays said that the latest fiscal measures could help cool increase in price, but are unlikely to be sufficient to divert the RBI from its path of monetary tightening.
“We expect the RBI to deliver a 50bp policy rate hike at its June meeting and to raise the rate to 5.15 per cent by August, before assessing macroeconomic momentum and gauging the need for further hikes,” the Barclays note added. After the recent May 4 unscheduled rate hike of 40 bps, the repo rate now stands at 4.40 per cent.
The new measures could play a key role in easing price pressures. “We estimate the motor fuel tax cuts could shave at least 20 basis points off headline CPI, while the subsidy on gas cylinders could lop 26 basis points off consumer inflation, but spread over May and June.”
The report highlighted that follow up tax cuts announced by State governments could also help in reducing price burden of consumers.
Expect another CRR hike
Barclays also believes that the RBI will look to reduce liquidity in a calibrated manner and may deliver another Cash Reserve Ratio (CRR) hike of 50 basis points at the next Monetary Policy Review (MPC) meeting, but applicable only from a later date.
“Still a front loaded rate hiking cycle does not imply a long tightening cycle, as the policy rate approaching 5.15 per cent by end of Q3 2022 would see the MPC meeting as the key milestone of unravelling pandemic era accommodation,returning to pre-Covid 19 levels of interest rates. That may provide some room for the central bank to reassess its policy stance, and to indicate that the bar for further tightening would be higher,” the note added.