The domestic financial market will look for improved transparency in the Union Budget announcements next month, according to a report by Singapore banking group DBS.

Any reduction in the fiscal deficit could result in a negative credit impulse in the near-term, but will need to be balanced with a credible consolidation plan further-out, according to the the bank’s research report India Budget Preview: Loosening the purse released on Thursday.

The report noted that the fiscal deficit in the first eight months of FY20 stood at 15 per cent above target, driven by weak revenues.

At an aggregate level, expenditure has been in line with the budget trend. The fiscal year-to-date (FYTD) deficit overshoot is not out of sync with past trends, it added.

This is because, typically, the fiscal run-rate worsens for three-fourths of the year and then moderates in the final quarter as expenditure is scaled back and seasonal revenue flows kick-in, wrote DBS economist Radhika Rao.

The run rate of the FY20 math, however, suggests that the 4QFY20 turnaround might be insufficient to contain a deficit slippage, Rao said.

Gross tax revenues rose by a modest 0.8 per cent year-on-year (YoY) in FYTD (by November), slowing from 1.2 per cent and 1.5 per cent in the previous two-months.

Expectations are high for non-tax revenues to provide a cushion. So far, this has comprised excess RBI dividends (0.25 per cent of GDP), partial payments by telecom companies following a court ruling, and divestment proceeds, wrote Rao.

The key strategic stake sale in five PSUs announced in November was an important move, but with less than a quarter left in this fiscal year, proceeds could accrue to FY21.

For FY20, by November, collections stand at Rs 18,000 crore, compared to a target of Rs 1.05 trillion (0.5 per cent of GDP). Factoring in a late push by sale of minority stakes and ETF collections, the count could improve to Rs 60,000 crore, yet below target.

To accommodate this revenue shortfall, we expect expenditure to be scaled back in 4QFY20, said Rao.

The Department of Economic Affairs has reportedly asked departments to compress their spending to 25 per cent of their budgeted sum in 4QFY20 versus 33 per cent in the past few years.

This might lead ministries who have underspent in the early part of the year to witness sharper cuts in 2H.

More savings are also likely via slower disbursements under the PM Kisan scheme, deferment in subsidy payments and delay in rolling out of sectoral measures announced in 2H19, reining in expenditure.

Netting of weak revenues and expenditure cuts against the background of an undershoot in nominal GDP, a slippage of 0.3 per cent in the deficit target is likely in FY20, according to Rao.

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