BL Research Bureau

At first glance, the Centre marginally breaching the 3.3 per cent fiscal deficit target for FY19 and keeping it at the same level for FY20, may have appeased bond markets. But as they say the devil lies in the detail! Not only has the Centre increased the gross market borrowings for the current FY19 fiscal by about Rs 40,000 crore (than what was expected) but has also increased the borrowings by a whopping Rs 1.4 lakh crore for FY20. This is a huge negative for the bond markets, and imply that the RBI may not cut rates in a hurry.

So how has the Centre managed the magical 3.4 per cent figure?

By bumping up GDP growth numbers substantially one day before the Budget for FY17 and FY18, the Centre has already given itself a slight head start. The higher base offers leeway to revise its nominal GDP figures for FY19 in its second advance estimate due on 28th Feb. Hence, despite the notable miss on the fiscal deficit target for FY19 in absolute terms (Rs 10,000 crore), a slight jugglery on the denominator (nominal GDP growth) can do the trick.

What is even more concerning is the alarmingly high gross market borrowings for FY20 which is a whopping Rs 7.1 lakh crore from Rs 5.7 lakh crore in FY19. Still the Centre has managed to retain a comforting 3.4 per cent on fiscal deficit, by assuming a 11.5 per cent growth in nominal GDP growth for FY20. Given the underlying trend in inflation, such a growth appears a tall task, given that the real GDP growth is expected to be 5.8 per cent in FY19.

Quality of fiscal

A lot more worrying is the fact that the increase in fiscal deficit results mainly in increase in revenue expenditure rather than capital expenditure which is the need of the hour. Capital expenditure is expected to grow by a meagre 6 per cent in FY20, while revenue expenditure shoots up by 14 per cent.

Fiscal profligacy could cost the economy dear in the long run.

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