Budget 2022: HDFC Bank Sees FY23 Fiscal Deficit Target At Close To 6%
The government is expected to target a steady reduction in the fiscal deficit target over the next financial year.
The fiscal deficit target for FY23 is likely to be close to 6% of GDP against 6.5-6.8% estimated in FY22, economists at HDFC Bank said in a report.
The tax collection and expenditure targets in FY23, they said, would be driven by three key factors:
The government wants to return to a path of fiscal consolidation as early as possible.
It must retain some space for “fiscal support” should the effects of Omicron linger or if there is yet another wave of the virus. This would largely take the form of revenue spending.
The need for funding capital expenditure to support growth. The government needs resources to implement this.
“All this points to the inevitable conclusion that the government’s ability to offer large fiscal incentives is limited,” chief economist Abheek Barua said. “However, some changes, both in terms of tax incentives, corrections in duty structures and measures to improve efficiency of domestic producers are expected.”
The central government had seen a sharp spike in the fiscal deficit due to the Covid crisis. In the previous budget, the government had laid down a roadmap to bring down the fiscal deficit to 4.5% of GDP by FY26.
Outlook For Bond Yields
The continued fiscal consolidation will help the bond markets, although other factors may keep bond yields elevated.
In the near term, the 10-year bond yield is expected to trade between 6.45% and 6.55% in the run-up to the budget, the report said. Rising Omicron risk, elevated crude oil prices and global yields (U.S. 10-year at 1.73%), continued foreign outflows as Fed tapers, and higher inflation prints are likely to maintain pressure on yields.
“The RBI (Reserve Bank of India) signaled its discomfort with rising yields in the last two weekly auctions, as it rejected bids, and partially devolved bond auctions.”
To recall, the 10-year yield has risen to 6.53%.
The central bank is likely to raise the repo rate by 75 basis points in total in FY23. “This along with rising global yields (U.S. yields expected at 2-2.25% by Dec 2022) are likely to put pressure on the 10-year.”
On the other hand, focus on fiscal consolidation, continued RBI intervention in the bond market, possibility of inclusion in global bond index and some moderation in inflation in the second half of FY23 is likely to provide support to yields, the report said.
“On balance, we expect the 10-year yield to rise to 6.7% by the second half of FY23.”