India Budget Deficit Seen Widening on Virus Relief Measures
India’s second wave of Covid-19 infections has set it on track to miss its budget deficit target for a fifth straight year.
Increased spending on pandemic-relief measures, coupled with revenues weakened by pandemic restrictions, could widen the deficit by as much as one percentage point, according to estimates from six economists.
Estimates by Nomura Holdings Inc. and Barclays Plc see the gap wider than 7% of gross domestic product for the current financial year, which started April 1. The government in its budget, released in February, estimated the gap at 6.8%. Mumbai-based Care Ratings Ltd. sees it widening to 7.8%.
Finance Minister Nirmala Sitharaman on Monday unveiled further aid to fight the virus impact on the economy, including an extension of the government’s loan-guarantee program. Along with measures announced earlier such as free food to the poor, these will further deplete government finances also hit by lower revenues from taxes and asset sales.
Amid persistently stubborn rising consumer prices, bond yields and swap rates have risen in anticipation of earlier-than-expected monetary policy normalization. The most traded 5-year bond yield is up 19 basis points in past two weeks, while 5-year swaps have surged 38 basis points. Bigger government borrowing could add additional pressure, said Kaushik Das, an economist at Deutsche Bank AG, projecting a deficit of 7.5% for the fiscal year.
“Bond market sentiment has already soured after the higher-than-anticipated consumer price inflation in May,” Das said. “Further risks of outsized additional market borrowing to fund a higher fiscal deficit would only make matters worse and complicate monetary policy action.”
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