North Block in New Delhi, Which Houses the Finance Ministry. (Photographer: Prashanth Vishwanathan/Bloomberg)

Government To Avoid A Fiscal Slip For A Second Year, Says Rajeev Malik

The central government will avoid missing its fiscal target for the second consecutive year and use all kinds of “tricks” to meet its stated goal, said Rajeev Malik, strategist at River Valley Asset Management, in an interview with BloombergQuint.

The government had set a fiscal deficit of 3.3 percent of GDP for 2018-19, after missing its initial goal of bringing the gap down to 3.2 percent of GDP in 2017-18. This year, too, government finances have been strained. Between April-November, the fiscal gap stood at 115 percent of the target, with both indirect tax revenues and non-tax revenues seeing a shortfall.

But there are always ways to meet the fiscal deficit number, specially under a cash-accounting regime, said Malik. He expects the fiscal deficit for next year to be projected at close to 3.3 percent of GDP.

I think they will meet the 3.3 percent of GDP target for FY19. They had slipped in the last fiscal year, too. So, overshooting a target two years in a row doesn’t look like a promising picture. My sense is they will come through on the 3.3 percent target, using all kinds of tricks available in a cash accounting setting. At the same time next year, they will stick to 3-3.3 percent of GDP fiscal target for next year.
Rajeev Malik, Strategist, River Valley Asset Management

By tradition, the budget ahead of a general election is merely a vote-on-account, which makes few major changes in policy. This year, however, with political pressures running high, the expectation is the Narendra Modi-led government will announce an intention to step up support to the farm sector.

Low food inflation has hurt farm incomes, prompting calls for a farm relief package. Upping the political ante, the Congress has promised a minimum income guarantee scheme if it comes to power.

Something needs to be done for the distress as far as the agriculture sector is concerned, acknowledged Malik, adding that farm sector concerns cannot be addressed by any single measure. The risk, Malik said, is that a brand new recurring liability will be created without addressing any of the existing expenditures.

Malik does not expect the fine print of the farm support scheme in the interim budget. Those details may need to wait until after a new government takes charge.

MPC Up Next

Just days after the budget will come the next monetary policy committee meet. With retail inflation at 2.2 percent, Malik expects the committee to cut interest rates at this meet. At its last meet, the committee had chosen to maintain a “calibrated tightening" stance, while paring down its inflation projections. The committee said it awaited more data before taking a call on a change in stance or rates.

There is no reason why the stance can’t be changed and rate cut be announced at same time, he said.

There is a reason to shift stance and cut rates. I don’t think there’s strong or weak case for aggressive easing. I have had this non-consensus view for some time that there will be two rate cuts.
Rajeev Malik, Strategist, River Valley Asset Management

Malik believes that there may be room for two rate cuts, which would take the benchmark repo rate back to 6 percent. After two hikes in 2018, the repo rate stands at 6.5 percent.

Watch the full conversation here: