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While the fiscal consolidation plan unveiled in the Budget is in line with expectations, the composition of fiscal deficit (FD) reduction based on optimistic revenue rise than on spending cuts is a disappointment, Goldman Sachs said on Friday.
The investment bank, therefore, is not optimistic about the Government’s ability to meet fiscal deficit target set at 4.8 per cent of GDP for FY14, and sees it’s touching 5 per cent on a possible fall in the revenue mop—up side.
“Given the Budget proposals, the fiscal deficit may be 5 per cent against the projected 4.8 per cent next fiscal.
Thus, the net borrowing requirement (Rs 4.88 trillion according to the Budget target) may be higher than budgeted,” Goldman Sachs said in a report.
The brokerage said the Budget could have a short—term negative impact on equities, bonds and the rupee as no new reform measures have been announced by the Finance Minister.
The report, however, noted that fiscal trajectory has changed for the better over the past months due to front— loading of consolidation and the Government’s debt ratio remains on a declining path.
On expenditure front, it said the Government has budgeted for a significant increase in expenditure to the tune of 16 per cent with a rise in non—subsidy current spending.
“While subsidies have been reduced significantly, there can be some upside to them, especially to food subsidy bill if the Food Security Bill is passed and implemented.”
In terms of spending priorities, Goldman Sachs said there is a significant increase in rural, agricultural, infrastructure, and social spending, apart from Rs 14,000 crore for recapitalisation of the public sector banks.
It said the Budget may be negative for bond yields due to higher—than—expected net market borrowing requirement. “RBI may need to do a significant amount of open market operations to finance the deficit and inject liquidity into the system.”
The report said the Budget would have negative impact on equity markets due to hike in the corporate tax surcharge. .
“We think the Budget may be negative for investor sentiment and for the rupee, at least in the short term, as it has not taken up any major proposals to bring down current account deficit (which touched 5.4% in Q2, FY13).”
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