Finance Minister fixed the government borrowing target announced in an provisional budget in February and cut the fiscal deficit target to 3.3% of gross domestic product for the current year ending March 31, 2020, from an earlier, upwardly revised target of 3.4%
The government’s yearly budget statement on Friday included actions which aimed at improving the investment climate but do not have any direct steps to stimulate a loosing economy, adding a pressure on Reserve Bank of India (RBI) to provide more direct help. Finance Minister Nirmala Sitharaman fixed to the government borrowing target announced in an provisional budget in February and cut the fiscal deficit target to 3.3% of gross domestic product for the current year ending March 31, 2020, from an earlier, upwardly revised target of 3.4%. Some predictors had expected a deficit as high as 3.7%.
Economists questioned whether the cautious budget was enough to counter severe headwinds, including weak monsoon rains, debt-burdened banks and trade tensions with the United States.
Sitharaman, presenting her 1st budget after her appointment to the finance ministry last month, did propose giving foreign investors a bigger role in India’s massive insurance and aviation sectors. The move is intended to help reverse weakening investment flows that have led to a drop in economic growth that threatens to take the shine off Prime Minister Narendra Modi’s recent landslide general election victory.
“The government announced a lower fiscal deficit target for fiscal 2020, while maintaining its support for growth and incomes. Achieving these challenging goals will be very interesting,” said Gene Fang, associate managing director, Sovereign Risk Group at Moody’s Investors Service.
Highlights of bigger rate cuts
Benchmark 10-year bond yields fell as much as of 19 basis points intraday to 6.5 percent following release of deficit numbers, which suggested India was preparation to keep its borrowing under control. It opens up possibility that Reserve Bank of India (RBI) may cut its benchmark rates by more than 25 basis points at upcoming meetings, according to some traders and analysts. “No fiscal slippage means development is now in RBI’s field, so more than 25 bps rate cuts possible,” said a senior fixed income trader at a private bank, who declined to be recognized. “Also, sovereign bonds may mean lower domestic issuance and not just this economic year but going forward this may be new trend.”
The central bank has cut interest rates by 75 basis points since the month of February and investors are now expecting at least one more rate reduction in the month of August. “Their (government) emphasis remains on the dealing with slowing growth but they have approached problem differently,” said Radhika Rao, an economist with DBS Bank in Singapore.
An underperformance in current monsoon rains is one new area of concern for government, as farm sector that employs nearly half of India’s working population is totally dependent on it. Any shortfall on rains could lead to the massive losses in crops, decrease farm incomes and affect consumption. Another concern is continued trade tensions with the United States (U.S)- as well as a weakening the global economy – that together are likely to keep exports in check.
But a series of measures have been announced to try to deal with one major obstacle to be a stronger & reduced – the debt-burdened state-owned banks and a liquidity-deprived shadow banking sector which included an injection of 700 billion rupees into the banks.
The difficulty small businesses and consumers have been facing in getting finance for buying has been affecting a number of industries, including the automakers. increased spending that Sitharaman did lay out in her statement – particularly on the infrastructure – is largely being funded through higher taxes on rich and increased duties on imported products.