Will The Government Pause On Fiscal Consolidation? Brokerages Weigh In

What brokerages think of India’s economic survey, and the implications for Union Budget.

People exersise outside the North Block of the Central Secretariat building which houses the Ministry of Finance and Ministry of Home Affairs (Prashanth Vishwanathan/Bloomberg)
People exersise outside the North Block of the Central Secretariat building which houses the Ministry of Finance and Ministry of Home Affairs (Prashanth Vishwanathan/Bloomberg)

Brokerage houses remain divided on whether the government will breach its fiscal deficit target for 2017-18 or stick to the path of fiscal consolidation in the upcoming Union Budget.

At least two brokerages, in reports released after the Economic Survey, said the government will most likely stick to its deficit target this year but may “take some leeway” from the path of fiscal consolidation next year.

The Indian government’s Economic Survey tabled yesterday, called for a “modest consolidation” while cautioning that credibility could be an issue if “overly ambitious targets” were not met. The survey said growth is likely to pick up in the coming year, leaving room for a deviation from the stated path of fiscal consolidation. “Setting overly ambitious targets for consolidation -- especially in a pre-election year -- based on optimistic forecasts that carry a high risk of not being realised will not garner credibility,” Chief Economic Adviser Arvind Subramanian had said.

India’s economy is set for a recovery in the current fiscal, as the teething issues from the Goods and Services Tax resolve, but policy makers should stay vigilant on managing macroeconomic stability risks in order to foster the growth, brokerages said.

Hitting The Pause Button

The key message from the economic survey appears to be that policy makers should continue to stay vigilant on managing macro-stability risks in order to foster the growth recovery, Morgan Stanley said.

“Policy makers will likely take a pause on fiscal consolidation, keeping the fiscal deficit target in at around 3.2-3.4 percent of GDP for F2018 and F2019”, the brokerage said. Besides the headline deficit numbers, investors will also watch for signs of redistributive spending, particularly for rural households, Morgan Stanley added.

In our view, it would be important to ensure that the efficacy of these social spending schemes is maintained or improved further, so as to limit the attendant impact on macro stability.
Morgan Stanley Report

‘Curb The Fiscal Enthusiasm’

Nomura expects the government to balance rural distress and “common man” issues without jeopardising fiscal consolidation, by relying more on asset sales, off-budget financing and higher tax buoyancy, it said in a report.

On the fiscal front, a pause relative to FY17 would imply a fiscal deficit of 3.5 percent of GDP in FY18 (versus budget target of 3.2 percent of GDP) and a modest and not aggressive consolidation would imply a target of 3.2 percent of GDP in FY19, both in line with consensus and our forecasts. 
Nomura Report

The survey although optimistic on growth revival, also sees risks on the horizon due to rising oil prices, it added. It further added that, the likelihood of a positive surprise on the fiscal deficit front, the Japanese financial services major added.

Sticking To Target

There is a high probability that the government will stick to its fiscal deficit target this year, although it might take some leeway from its fiscal consolidation path, the treasury department of HDFC Bank said in a note released today.

A 3.2 percent fiscal deficit reading for this year would help boost market sentiments and there could be a marginal correction in the bond yields in the interim. However, moving ahead, in the medium term (for Q2-2018), we still expect bond yields to rise as inflation concerns set in and fears of a rate hike begin to daunt the market sentiment.   
HDFC Bank Report

Comfort On FY19 Fiscal Health

Credit Suisse sees some comfort on the fiscal situation in financial year 2018-19. While the survey points to no consolidation in FY18, the trends “suggest comfort on FY19, in line with our expectations,” it said.

The concern flagged through the rise in bond yields is also a sign that the government has noted the bond market’s skittishness.
Credit Suisse Report

However, the “Economic Survey is not really a precursor to the union budget; that is, its projections and recommendations may not shape the upcoming budget,” the brokerage noted.

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