‘Risks tilted towards higher FY19 deficit’

Goldman Sachs estimates 20 bps upside risk, says revenue targets optimistic

FILE - In this Dec. 13, 2016, file photo, the logo for Goldman Sachs appears above a trading post on the floor of the New York Stock Exchange. Goldman Sachs is expecting a $5 billion hit to profits during the fourth quarter because of the tax overhaul recently signed into law. The New York bank said Friday, Dec. 29, 2017, that two thirds of the $5 billion are due to changes in repatriation taxes, when funds are returned from overseas. (AP Photo/Richard Drew, File)

The budgeted fiscal deficit for India 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, said 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 basis point 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.

The government outlined a fiscal deficit target of 3.3% of GDP in 2018-19 as against a revised estimate of 3.5% 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.

‘Spending cut unlikely’

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% of GDP versus the 3.3% 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’ 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.