The Government stands firm on achieving 3 per cent fiscal deficit target. This will now be achieved in three years (2017-2018) instead of two. This fiscal leeway has pushed the 2015-16 fiscal target to 3.9 per cent from 3.6 per cent. The Budget also proposes to set up a Public Debt Management Agency, bringing external and domestic borrowings under one agency.
Finance Minister Arun Jaitley has kept his word and met the fiscal target of 4.1 per cent for 2014-15. While the 2015-16 fiscal target has been set higher than expected, this is not a matter of concern. One, the Budget proposes to use the additional space to fund infrastructure investment. Two, a fiscal deficit of 3.9 per cent means the gross market borrowing will stand at ₹6 lakh crore, almost at par with 2014-15 levels. The net borrowing, at ₹4.56 lakh crore, is marginally lower than 2014-15. Three, given the Centre’s commitment to walk the tight fiscal path, the RBI will now have the much-needed headroom to ease monetary policy. A conducive fiscal deficit will also mean a lower current account gap and, hence, the lower threat of a downgrade by international credit rating agencies. Prima facie , the growth of 16 per cent in gross tax receipts appears achievable. The budget assumes ₹41,000 crore divestment proceeds from stake sales in PSUs. It could raise just half the projected ₹43,000 crore in 2014-15, but that appears to be due to a late start.
The Budget not springing any surprises on the borrowings front is good news for the bond markets. Yields on the 10-year government bond have been trending lower in the last year —down by about 1 percentage point. And the RBI lowering its key policy rate in January by 25 basis points implies the beginning of a rate cut cycle. The Centre’s commitment on fiscal deficit and the sustainability of falling retail inflation will pave way for more rate cuts. A continued reduction in the statutory liquidity ratio (now at 21.5 per cent) will also lead to less crowding out of private credit.
The setting up of the Public Debt Management Agency is also a positive move for bond markets as it aims at developing the market. . Until now, the RBI managed the government’s borrowing programme. However, there was concern that this may lead to a conflict of interest, as the RBI also sets the policy rates. However, it will be imperative that the debt management entity is run by a competent team, familiar with the nuances of the debt market.