Inflation Control Measures May Push Up Fiscal Deficit To 6.8%: Nomura

India's fiscal deficit could worsen to 6.8% of GDP in the year to March 31, 2023, as compared with the budget estimate of 6.4%, due to the measures taken to fight inflation.

That's according to Nomura Research, which in a May 22 report also raised its fiscal deficit forecast for FY24 to 6.4% from 5.8% previously.

"We expect fiscal headwinds (excise cuts, higher food & fertiliser subsidies, lower dividends and disinvestments) to offset the tailwinds (higher tax revenues and higher nominal GDP growth)," Nomura analysts Sonal Varma and Aurodeep Nandi said in the report.

In a series of tweets Saturday, Union Finance Minister Nirmala Sitharaman announced that the central government will cut excise duty on petrol and diesel by Rs 8 per litre and Rs 6 per litre, respectively. She also announced a hike on fertiliser subsidy (0.4% of GDP) to protect farmers, as well as a subsidy LPG cylinders for low-income households. The government also introduced trade measures to cool prices of iron and steel, coal and plastics.

Nomura expects these measures to have a direct impact of nearly 20 basis points on Consumer Price Index--a barometer for retail infaltion--and an additional impact of 10-20 basis points from second-round effects.

"However, we are leaving our CPI inflation projection for FY23 unchanged at 7.2% YoY, due to a spate of other upside risks," Varma and Nandi said.

The research house expects the Monetary Policy Committee to hike the benchmark repo rate by 50 basis points in June and 35 basis points in July.

Rising fiscal risks (bond demand-supply gap) will likely complicate the Reserve Bank of India's liquidity withdrawal strategy. A lack of any substantial fiscal consolidation could also contribute to higher term premium over the medium term, Nomura said in its report.