Budget 2018: Goldman Sachs warns of higher slippage next year even as fiscal deficit lies on expected lines

New Delhi: The budgeted fiscal deficit is in line with expectations but there are some risks of slippage in financial year 2018-19, unless economic activities formalise at a rapid pace, says a Goldman Sachs report. According to the global financial services major, while the budgeted deficit is in line with expectations, the revenue targets are on the optimistic side, particularly on recently-introduced GST tax revenue growth. “We estimate a 20 bps upside risk to the fiscal deficit in 2018-19, unless economic activities formalise at a rapid pace over the coming year to generate the necessary buoyancy in revenues,” Goldman Sachs said in a research note. [caption id=“attachment_4304091” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] The government outlined a fiscal deficit target of 3.3 percent of GDP in 2018-19 as against a revised estimate of 3.5 percent in 2017-18, indicating some fiscal consolidation, albeit at a slower pace than that recommended under the Fiscal Responsibility and Budget Management (FRBM) framework. According to Goldman Sachs, risks tilted towards a higher fiscal deficit for 2018-19. Lower indirect tax revenue collections may outweigh any upside risks from higher nominal GDP growth, non-tax revenue and direct tax collection, it said adding the government is unlikely to cut spending considerably next year, even if revenues undershoot the budgeted amount, in order to support growth ahead of the elections. “This could take the fiscal deficit to 3.5 percent of GDP versus the 3.3 percent budgeted,” it noted. Moreover, higher oil prices could exert additional pressure on the fiscal deficit. Based on the overall oil subsidy estimate in the budget, the government appears to have assumed oil prices to average between $60-65/bbl, about $10-15/bbl lower than the Goldman Sachs commodity team’s oil price forecast. “We estimate that every $10/bbl increase in oil prices could increase the fiscal deficit by 0.3 percentage point of GDP if the government absorbs the entire shock,” it said. Goldman Sachs’ equity analysts see the Budget as positive for infrastructure, industrials, autos, financials, and healthcare, but negative for oil and gas sector. Click here for full coverage of Union Budget 2018 .