New Delhi/Mumbai: A day after the goods and services tax (GST) data for December showed a slide in revenue receipts, the government on Wednesday signalled that it may breach its fiscal deficit target of 3.2% of gross domestic product (GDP) by expanding its market borrowing programme for this financial year by Rs50,000 crore.
This may force finance minister Arun Jaitley to recalibrate his fiscal consolidation roadmap of achieving a fiscal deficit of 3% of GDP by 2018-19.
In the budget, the government had pegged its aggregate gross market borrowing at Rs5.8 trillion. With Wednesday’s revision, the number now stands at Rs6.3 trillion.
Madan Sabnavis, chief economist at Care Ratings, said the government is preparing the market for a fiscal slippage. “Though higher disinvestment accruals and dividend receipts from public sector units may act as mitigating factors this year, fiscal deficit may still go up by 30 basis points to 3.5% as a result of the Rs50,000 crore additional borrowing,” he added. One basis point is one-hundredth of a percentage point.
The change in the borrowing schedule comes weeks after Moody’s Investors Service upgraded India’s sovereign rating for the first time in 14 years.
The finance ministry said in a statement that the government will not be raising any net additional borrowing “between now and March 2018” as it plans to trim its short-term borrowing programme.
“With revised borrowing, for fiscal 2018, issuance of dated securities will increase by Rs50,000 crore. But the impact on fiscal deficit could be around Rs25,000-30,000 crore because part of it is offset by lower T-bills issuance. Therefore, fiscal deficit could be higher by 20 basis points only due to higher borrowing,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.
Aditi Nayar, principal economist at ICRA Ltd, said the government’s proposal does not rule out a fiscal slippage in the current financial year.
“A fiscal slippage, if any, may get funded through higher-than-budgeted small savings collections,” she added. Nayar expects a mild fiscal slippage in 2017-18.
Separately, the government on Wednesday also cut the interest rate on small savings schemes such as Public Provident Fund, Kisan Vikas Patra and Sukanya Samriddhi, by 0.2 percentage point for the January-March quarter.
GST receipts are a cause for concern. Total GST collection, including taxes on inter-state supplies and the cess on certain items, added up to Rs80,808 crore in December. This was a 14% drop from receipts in August, the first month of tax collection and return filing under the new indirect tax system that kicked in on 1 July.
The government has so far managed to raise about three-fourths of the targeted Rs72,000 crore through disinvestment, according to information available from the finance ministry.
Net direct tax receipts, however, grew 14.4% to Rs4.8 trillion in the April-November period from a year ago. Still, faster economic growth in the latter half of the current financial year could give fresh impetus to revenue collection.
N.R. Bhanumurthy, professor of economics at the National Institute of Public Finance and Policy, said the 3.2% fiscal deficit target was estimated in a business-as-usual scenario.
“On the back of two policy shocks (demonetization and GST), we should give the government some leeway on the fiscal front. It is difficult to estimate the impact of additional borrowing on fiscal deficit since revenue mobilization is currently in an uncertain territory,” he added.
In April-October, the fiscal deficit scaled 96.1% of the fiscal deficit targeted for the full year against 79.3% during the same period a year ago due to higher revenue expenditure, according to data from the Controller General of Accounts.
“This news is negative for the bond market. Since the duration of a dated bond is higher than a T-bill, such bonds carry higher interest rate risks,” said Gaurav Kapur, chief economist with IndusInd Bank Ltd.
Bond yields, which have been rising for the past few sessions on worries of a fiscal slippage, may rise further owing to the supply glut. Bond prices and yields move in opposite direction.
In morning trade on Wednesday, the yield on the 10-year benchmark bond had hit a high of 7.31%—a level last seen on 12 July 2016. However, it erased some losses and closed at 7.222%, compared with its previous close of 7.275%.