Mumbai: There is a growing market fear that the fiscal deficit in 2008-09 may be as high as 6-6.5% but the budget to be unveiled in early July may surprise with a figure of around 5.5%, HDFC Bank has said.
“We believe that the budget will take a step towards fiscal consolidation and the fiscal deficit target will be in the neighbourhood of 5.5% as against market expectations of 6-6.5%,” the bank said in its report.
The market fears of a high fiscal deficit are based on the opinion that the government would continue with stimulus packages to prop up growth, it said.
The report said that the net and gross borrowing of the government was unlikely to be very different from the Rs3,08,647 crore and Rs3,61,782 crore figure announced earlier in the year.
The private sector bank predicted a roll-back (at least partially) of the indirect tax reductions announced as a part of the December 2008 and February 2009 fiscal stimulus.
“These along with the natural revenue buoyancy associated with economic recovery should keep the interim revenue target supported through FY 10,” it said.
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The HDFC Bank report said while further increase in allocation to flagship programmes such as the NREG was possible, “it is somewhat unlikely that this will add up to a substantial increase in expenditure. We certainly believe the additional expenditure for the plan will be well below 1% of GDP.”
It said that with large allocations for income transfers such as the enhanced salaries for government employees under the 6th Pay Commission already built into the interim budget, additional allocations on this account are unnecessary.
A programme of “creeping disinvestment” in a number of PSUs would yield the government significant capital receipts that can help fund additional expenditure, it said.
“The priority going forward to aid an economic recovery would be to ensure that investment expenditure starts to pick up,” the report said.
For this, two things are important — ensuring that government borrowing does not compete aggressively with private credit demand and helping sustain the turn in international investor sentiment towards India in order to encourge adequate debt and equity capital inflows, the report said.
“An attempt at some degree of fiscal consolidation will go a long way in ensuring this,” the report said.
The HDFC Bank said that while the final budget fugure will entail some increase in the allocation for planned expenditure and possible concession on income tax, proceeds from disinvestment and the 3G spectrum auction process should provide a significant cushion to the FY 10 fiscal deficit figure.
Further, a selective reversal in the tax cuts undertaken since December 2008 is likely to translate to a fiscal deficit to GDP ratio of close to 5.7%, slightly higher than the interim budget target of 5.5% but smaller than the 6-6.5% level built into market expectations,“ the report said.