Budget 2019: Govt set to miss fiscal deficit target by a full 40 bps, says Bank of America Merrill Lynch report

Mumbai: The government is set to breach the fiscal deficit target yet again by 40 bps for 2018-19, and raise the target to 3.5 percent for next fiscal in the forthcoming budget that may be skewed towards the rural economy, says a foreign brokerage report.

In a note Friday, Bank of America Merrill Lynch, however, said the fiscal "risks are overdone".

"We expect the government to target a fiscal deficit of 3.5 percent for FY20, after ending FY19 at 3.7 percent, 0.40 percent higher than the target," the note said.

It can be noted that the Modi government has not met the fiscal targets in all these years, barring in FY15 when it improved upon its own target by a tad, and missing it marginally in the rest of the years.

Representational image. Reuters.

As of November, it has used up 115 percent of its budgeted market borrowings amidst slowing GST collections and a poor show on the divestment side. Against the Rs 80,000 crore budgeted target, it has achieved only around Rs 15,000 crore so far.

The report, however, notes that the government may not borrow more to the deficit will be funded by drawing down on government balances with the RBI which as of March 2018 had stood at Rs 1.675 trillion.

The net government borrowing may come in at Rs 5.07 trillion for FY20, it estimated.

It can be noted that even in the face of the budgeted target being overshot, the government has been repeatedly stressing on meeting the FY19 target of 3.3 percent.

The brokerage said even though the 3.5 percent target is higher than the target, it is still below the medium-term average of 4.3 percent.

Seeking to allay concerns on the inflationary impact of the fiscal gap being breached, it said "slippages of 0.25-0.50 percent of GDP at this level can hardly be inflationary given the slack capacity in the economy."

It said providing the adequate liquidity support is more important than meeting the fiscal deficit targets and pitched for a $26 billion of government bond buybacks by RBI in FY20.

At the February 1 budget, the final one before the general elections, the government will try to address rural distress by interest subvention/direct income transfers supporting consumption over investment, it said.

"The budget should ideally not propose any new direct taxes, and the finance minister should take steps to alleviate stress in the hinterlands," it said.

It estimates support of Rs 30,000 crore in interest subvention by waiving off the 4 percent interest paid by farmers who repay on time and also a Rs 70,000 crore commitment as income support to farmers.

Follow full coverage of Union Budget 2019-20 here

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