Budget 2020

Fiscal glide path pushed back to 2021

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Bond yields rise as the government misses deficit target of 3.2%; analysts expect yields to remain elevated.

The last full budget of the Narendra Modi-led Bhartiya Janata Party government before the general elections due in 2019 missed the fiscal deficit target of 3.2% for 2017-18. This was attributed to revenues to be received under the Goods and Services Tax (GST) for 11 months, instead of 12. The revenue for March will be received in April.

The shortfall in GST revenue was ₹50,000 crore.

Finance Minister Arun Jaitley, in his budget speech, said the fiscal deficit for 2017-18 would be ₹5.95 lakh crore, which is 3.5% of GDP. The fiscal deficit for 2018-19 is pegged at 3.3%.

“In order to impart unquestionable credibility to the government’s commitment for the revised fiscal glide path, I am proposing to accept key recommendations of the Fiscal Reform and Budget Management Committee relating to adoption of the Debt Rule and to bring down Central Government’s Debt to GDP ratio to 40%,” Mr. Jaitley said in his budget speech.

In the post-budget media interaction Mr. Jaitley said meeting the fiscal deficit target should not be a problem because the government would receive revenues for 12 months.

“We were getting the GST revenue for one month less this year. The March revenue will be received only in April. That statistical factor should be borne in mind when we calculate the difference between 3.5% and 3.2%. That really amounts for a substantial part of that,” Mr. Jaitley said.

The government said the fiscal deficit target for next financial year would be 3.3% and 3.1% for the year after and then 3% for 2020-21.

Bond prices slumped as the government missed the fiscal deficit target with the yield on 10 year government bond shot up 17 bps to end the day at 7.6%. Yields are expected

“The government’s decision to stray from the fiscal glide path of getting to a level of 3.2% this year and 3.0% the next could also weigh on market sentiment, especially when we are in the middle of a selling mania,” economists at HDFC Bank said in a note to its clients.

“Therefore, we expect the bond yields to remain elevated and trade in the range of 7.45% to 7.55% in the near-term,” it said.

Government borrowing

The government pegged its net market borrowing at ₹4.62 trn in FY19 (excluding buyback and switches), which is in line with what the market had estimated.

Mr. Jaitley said the country had seen average growth of 7.5% in the first three years of the current government’s reign and GDP growth at 6.3% in the second quarter signaled a turnaround of the economy and ‘firmly on course to achieve 8% growth’.

“We hope to grow at 7.2% to 7.5% in the second half. IMF, in its latest ipdate, has forecast that India will grow at 7.4% next year. Manufacturing sector is back on a good growth path,” he said.

“The services, mainstay of our growth, have also resumed their high growth rates of 8% plus. Our exports are expected to grow at 15% in 2017-18. We are now firmly on course to achieve high growth of 8% plus,” Mr. Jaitley said.

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Printable version | Jan 27, 2020 5:39:46 PM | https://www.thehindu.com/business/budget/fiscal-glide-path-pushed-back-to-2021/article22625054.ece

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