The government will contain its fiscal deficit at 3.2 percent during fiscal year 2018, Finance Minister Arun Jaitley announced as part of the Union Budget 2017 presentation on Wednesday.
The deficit of 3.2 percent is lower than the 3.5 percent budget estimate for fiscal 2017.
While remaining focused on consolidation, the government has failed to adhere to the target of 3 percent for fiscal 2018 set under the existing Fiscal Responsibility and Budget Management (FRBM) framework. The government intends to bring down its fiscal deficit to 3 percent next year.
The revenue deficit for fiscal 2018 has been pegged at 1.9 percent compared to 2.1 percent in fiscal 2017.
As part of Budget 2017, the finance minister said that the government would restrict its net borrowings to Rs 3.48 lakh crore compared to Rs 4.25 lakh crore last year. The gross market borrowing has been set at Rs 5.8 lakh crore.
The government has set a divestment target of Rs 72,500 crore. This number, which is much higher than last year's target of Rs 56,500 crore, may include funds raised through the listing of railway public sector enterprises which was announced as part of the budget.
Reacting to the fiscal deficit announcement, bond yields first fell but then rose to 6.44 percent. The benchmark 10-year bond yield was trading at 6.41 percent at opening of trade on Wednesday. Markets had built in some slippage from the 3 percent target in Budget 2017 and had forecast a fiscal deficit range of 3.2-3.3 percent of GDP. The Union Budget announcement is in line with that forecast.
There is some skepticism about the low net borrowing number announced by the government, said a bond market trader on the condition of anonymity. The net borrowing is likely to take buybacks and redemptions, he added.
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New Fiscal Roadmap
The fiscal roadmap has been reviewed by a committee set up under the chairmanship of former Revenue Secretary NK Singh. The five-member committee also included Reserve Bank of India governor Urjit Patel.
The committee has recommended that the economy follow a sustainable debt path and said that this should be the anchor for fiscal policy. According to the committee's recommendation, the debt-to-GDP ratio for India should be brought down to 60 percent of GDP by 2023. 40 percent of this would be the Centre's debt and 20 percent would be debt held by states.
At present India's debt-to-GDP ratio is at 66 percent and is higher than that of its emerging market peers.
The government's Economic Survey released ahead of Budget 2017, however, had argued that India needs to remain focused on both the fiscal deficit and the stock of debt.
With regards to the fiscal deficit, the committee has recommended a 3 percent fiscal deficit for the next three years. It has also designed an ‘escape clause' for deviations upto 0.5 percent of GDP from the target. Triggers to take recourse to this escape clause include far reaching structural reforms that may impact the fiscal position of the government.
The report of the FRBM committee would be examined carefully and a decision will be taken in due course. Nevertheless, I take note of the committee's recommendation of a 3 percent fiscal deficit for the next three years. I have taken into account the need for higher public sector expenditure due to sluggish private sector investment and slow global growth. I have kept in mind the recommendation of the committee that sustainable debt should be the underlying basis of prudent fiscal management. Considering all these aspects, I have pegged the fiscal deficit at 3.2 percent of the GDP.Arun Jaitley, Finance Minister
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No Big Surprise, Says Moody's
In a note released immediately after the Union Budget, rating agency Moody's Investors Service said that the marks a continuation of the government's fiscal objectives and policies.
The budget speech's emphasis on fiscal prudence indicates that continued commitment to gradual fiscal consolidation remains. This is consistent with the target of a deficit at 3.2 percent of GDP this fiscal year, followed by 3 percent. These targets are not materially different from the previous roadmap and our projections.William Foster, Vice President, Sovereign Risk Group, Moody's Investors Service
Moody's said it expects the deficit targets to be achieved
“The FRBM committee's recommendation of targeting a debt to GDP ratio to 60 percent by 2023 is broadly in line with our projections. It would imply gradual fiscal consolidation, largely through higher nominal GDP growth feeding in the government's revenues. We think that it would be an achievable target, as long as nominal GDP growth is sustained at robust levels,” Foster said.
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