Govt to opt for wider fiscal deficit target of 3.2% in FY19; borrowings may swell to Rs 5.2 lakh cr: DBS

Mumbai: A fiscal slippage in FY18 will likely result in the government opting to go for a wider gap for 2018-19 in the upcoming budget, foreign lender DBS said on Thursday. The fiscal deficit number for 2017-18 will come at 3.5 percent as against the targeted 3.2 percent of the GDP and it will result in the government opting to settle for a target of 3.2-3.3 percent rather than the 3 percent under the fiscal consolidation roadmap. [caption id=“attachment_4260459” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] “The FY18 deficit might be pegged at 3.5 percent of GDP (similar to FY17), which opens room for the FY19 target to be set at 3.2-3.3 percent compared to the roadmap’s 3 percent,” Singaporean lender DBS said in a note. It can be noted that the government has already exhausted 112 percent of the 2017-18 target by November 2017, with four months to go. It also announced an additional borrowing of Rs 50,000 crore for FY18. DBS attributed the difficulties on the fiscal math to the shortfall in receipts and added that the expenditure has stayed on the planned course. It said the expenditure compression in the remainder of the fiscal will have to be aggressive if the 3.2 percent target has to be met. A higher fiscal deficit target for the next fiscal will result in a higher borrowing by the government, it said. “Expectations are building for a populist budget, targeted at rural/ agricultural development, job creation, and effective implementation of social sector schemes,” it said.

Trends in central govt fiscal deficit as % of GDP Infogram

Opting for a fiscal deficit target of 3.2-3.4 percent will lead to a surge in Government borrowings to Rs 4.8-5.2 lakh crore, it said. A wider deficit, which is generally seen as being inflationary in nature, will lead the Reserve Bank to settle for a long pause in its rates stance, it said, adding that factors like inflation “warrant attention”. The headline inflation may go up to 5.2-5.4 percent range in December, it said, adding that the price rise situation will not abate to the 4 percent target set for RBI for the next six months. The bond yields, which are rising lately, will move further and the benchmark will be trading at 7.5-8 percent in the coming quarters, it said. For full coverage of Union Budget 2018, click   here.