New Delhi: Pace of fiscal tightening is likely to slow down next fiscal year, with the government’s deficit target expected to be higher at 3.7 per cent of GDP, says a DBS report.
The target for 2016-17, as per the earlier roadmap, was 3.5 per cent and is likely to be pushed back.
According to the global financial services major, the fiscal slippage in the next financial year would be largely due to the need to accommodate higher spending commitments, especially a bigger public sector wage/pension bill and rising banks’ recapitalisation needs.
“On the fiscal math, signs are that the FY15/16 fiscal deficit target will not be breached,” DBS said, adding that the “pace of fiscal tightening is likely to slow in FY16/17, with the deficit target to be adjusted higher at 3.7 per cent of GDP”.
It said worries over bank capitalisation were revived after key public-sector banks reported a sharp jump in non-performing loans and higher provisions in the December 2015 quarter.
The report further noted that the budget session of the Parliament, which commenced on Tuesday, would be crucial for investor sentiment.
“Any signs of a washout session will prove detrimental, in midst of foreign portfolio outflows which are down cumulative $2 billion so far this year, a fifth last year’s total flows,” the report noted.
Passage of key bills, including the crucial Goods and Services Tax (GST), bankruptcy code and the real estate bill are likely to be back in focus.
“Indications are that these bills might yet again meet strong opposition resistance, ahead of which all-party deliberations have been on-going,” DBS said in its research note.
Markets meanwhile, would keep a close eye on the progress of the reform agenda, also before five key state elections due around April-May, it added.