Government May Meet Fiscal Numbers This Year, Says SBI Research Report

Taking a contrary stance from their peers, the economists at SBI Research see the government meeting the fiscal deficit target this year and the same is likely to be pegged at Rs 6.72 lakh crore or 3.2 percent of gross domestic product in the next fiscal year, assuming a moderate nominal GDP growth of 11.7 percent, says a report.

"For financial year 2020, fiscal deficit is likely to be Rs 6.72 lakh crore or 3.2 percent of GDP, assuming a modest 11.7 percent of nominal GDP growth," SBI Research said in a report on Wednesday, adding for financial year 2019 the fiscal gap will be met at the budgeted 3.3 percent.

The government's gross market borrowing in financial year 2020 will be Rs 6.50 lakh crore while net market borrowing to be at Rs 4.13 lakh crore, less than financial year 2019 estimate of Rs 4.20 lakh crore, the report said.

To keep the redemption in check, the report estimates switching of securities worth around Rs 30,000-35,000 crore, which would bring in gross borrowing near the financial year 2019 budgeted target of Rs 6.05 lakh crore.

"We are expecting minimum buybacks in financial year 2020 as the government may be carrying forward a minimal cash balance into financial year 2020," it said.

The government has also dipped into small savings scheme to meet a part of its expenditure in financial year 2019. As against the budgeted amount of Rs 75,000 crore (revised later to Rs 1 lakh crore), borrowings through small savings have reached Rs 45,396 crore by November 2018, it said.

It said a large funding through the National Small Savings Fund is possible owing to interest gap between bank deposits and the small saving rates.

The gap between the small saving interest rate (average of PPF and Sukanya Samridhi accounts rates) and average term deposit of year maturity being offered by banks still remains around 98 basis points.

"However, this may make it difficult for banks to reduce deposit rates," it said.

In the past few months, with deposit growth significantly lagging credit growth, banks have been increasing deposit rates to avoid deposit flight.

For the fortnight to Jan. 4, 2019, on an annualised basis, the aggregate deposits grew 9.9 percent or Rs 10.85 lakh crore and advances rose 14.5 percent or Rs 11.85 lakh crore.

"Such widening gap between deposit and credit growth requires build up of liquidity, which has to be met through the banking channel since in the event of no buyback of securities and RBI not doing aggressive open market operations, the banks would have to manage liquidity by focusing on deposit growth," it said, adding next year may see a hardening of interest rates.

For FY20, the aggregate borrowings by the states is likely to be around Rs 5.5 lakh crore and net borrowing at around Rs 4.1 lakh crore.