Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Government Set To Exceed Fiscal Deficit Target, Warn Economists

A day after the government announced an increase in its planned borrowings for the current financial year, economists noted that a breach of the fiscal deficit target for this year seems inevitable. The government may also find it difficult to bring the fiscal deficit down to 3 percent next year, as envisaged by the Fiscal Responsibility and Budget Management (FRBM) Act.

On Wednesday, the government said it would increase gross borrowings via dated securities by Rs 50,000 crore, taking the total borrowings to Rs 6.3 lakh crore for the current year. In addition, for the full year, the government seems to be borrowing an additional Rs 23,000 crore via T-Bills.

While the government said that there would be no additional net borrowings, most market participants said that this may be true for the January-February period. For the full year, borrowings are set to be higher. This, in turn, points to a higher fiscal deficit, said economists.

Kotak Mahindra Bank Ltd. expects the fiscal deficit for the current year to settle at 3.7 percent - 50 basis points above the targeted 3.2 percent. Weaker GST revenues, lower tax buoyancy due to subdued growth, lower RBI dividend transfer, and limited rationalization on the expenditure front are factors that have contributed to the higher deficit likely this year, wrote Kotak Mahindra Bank economists Madhavi Arora and Upasna Bhardwaj in a report on Thursday.

With the higher-than-expected borrowing shock, market sentiments will likely sour further.
Kotak Mahindra Bank 

Indranil Pan, economist at IDFC Bank Ltd. said that fiscal deficit for the year may hit 3.6 percent. “Overall fiscal slippage could be by around 0.4 percent of GDP. Thus the government could announce a fiscal deficit of 3.6 percent of GDP for FY18,” Pan wrote.

IDFC Bank, in its report, added that the likely fiscal slippage also suggests that the government will not be “keen on curtailing its capital expenditure budget in order to stick to the fiscal target.” The government has used up 96 percent of it fiscal deficit target between April-October. To avoid exceeding the target, it would need to trim expenditure which has a negative impact on growth.

Yield on the benchmark 10-year bond jumped in early trade on Thursday, hitting 7.32 percent. Bond yields have been on the rise fearing fiscal slippage and increased borrowings. Concerns have also now started to build up over the fiscal deficit target for next year. Under the existing FRBM framework, the government had committed to bringing its fiscal deficit down to 3 percent by 2018-19.

Bringing down the deficit from 3.5 percent to 3 percent in a single year would be difficult, said Independent economist Ananth Narayan to BloombergQuint.

It does seem unlikely that we will get to 3 percent next year. It would probably be closer to 3.2-3.5 percent. But there are too many moving parts right now. We still don’t know where GST revenues will settle. We still don’t know how commodity prices are going to play out. But 3 percent does seem difficult particularly in the run up to an election year.
Ananth Narayan, Independent Economist