Budget 2020 | Government bites the fiscal deficit bullet

It sets in motion a trigger mechanism for deviation; target for the next year is pegged at 3.5% of the GDP

The government has decided to bite the fiscal deficit bullet in the wake of lower tax collections, amid a slowing economy, by allowing fiscal deficit to go up to 3.8% of the GDP for the current financial year, compared with 3.3% projected in the previous year’s Budget.

Finance Minister Nirmala Sitharaman cited Section 4 (2) of the Fiscal Responsibility and Budget Management (FRBM) Act that provides for a trigger mechanism for a deviation from the estimated fiscal deficit on account of structural reforms in the economy “with unanticipated fiscal implications”.

“Therefore, I have taken a deviation of 0.5%, consistent with Section 4(3) of the FRBM Act, both for RE 2019-20 and BE 2020-21,” she said.

The fiscal deficit target for the next year is pegged at 3.5% of the GDP.

“...the return path is being laid before Parliament as a part of the Medium Term Fiscal Policy-cum-Strategy Statement. This fiscal path commits us to the path of fiscal consolidation without compromising on the needs of investment out of public funds,” Ms. Sitharaman said.

The government said net market borrowings for 2019-20 would be ₹4.99 lakh crore and ₹5.36 lakh crore for the next financial year. The Finance Minister said a good part of the borrowings for the financial year 2020-21 would go towards capital expenditure of the government that had been scaled up by more than 21%.

In line with expectations

“For the bond market, the borrowing numbers seem to be broadly in line with market expectations and are unlikely to put a significant pressure on yields in the short term,” said Abheek Barua, Chief Economist, HDFC Bank. Bond markets were closed on Saturday.

‘No rate cut possible’

However, market participants said the scope for interest rate reduction is now ruled out with a higher fiscal deficit number. “Increase in fiscal deficit will put pressure on inflation, which is on the rise. The Reserve Bank of India will not have much scope for further rate cut,” said the treasury head of a large public sector bank.

After reducing interest rate by 135 bps between February and October, 2019, the RBI decided to hit the pause button at the last monetary policy review in December, citing inflation concerns.

The RBI Governor had hinted that he would await the budget for future course of action on the monetary policy front.

The central bank will announce the outcome of its next monetary policy review on February 6.