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Business News/ Money / Personal-finance/  Government has headroom to meet spending commitments: Report
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Government has headroom to meet spending commitments: Report

Helped by a rare fiscal surplus in August, the April-August fiscal deficit accounted for 66.5% of the full year budgeted target, narrowing from nearly 70% last month

Pradeep Gaur/MintPremium
Pradeep Gaur/Mint

Even as the Indian government faces higher spending commitments this year with the likely implementation of the pension scheme for armed personnel and additional funds for banks’ capital infusion needs, there is sufficient headroom within the Budget, said a DBS Bank report, Economies, Currencies, Rates: Daily Breakfast Spread.

India’s cumulative fiscal deficit in the first five months of the financial year (FY) 2015-16 scaled back on higher non-tax revenues support, while expenditure remained on track.

Helped by a rare fiscal surplus in August, the April-August fiscal deficit accounted for 66.5% of the full year budgeted target, narrowing from nearly 70% last month and down from 75% in the comparable period year ago. On a 12-month trailing basis, the fiscal deficit is tracking close to official targets.

Spending outlays have reached 41% of this year’s target, with both plan and non-plan disbursements staying on track. Bulk of the improvement stemmed from non-tax revenues, which jumped 43% year-on-year in August and has already accounted for two-third of the annual target.

These collections were buoyed by a record jump in the Reserve Bank of India’s (RBI) surplus transfers to the government, up 22% from the previous year. With other state-owned institutions expected to add to this kitty through the year and spectrum inflows, there is sufficient pipeline support for non-tax receipts this year.

Tax revenues, meanwhile, lagged at only a fourth of the annual budget seen by August. However, the seasonality of these collections will help shore up the government’s finances later in the year. While higher revenues are timely, the government faces higher spending commitments this year with the likely implementation of the pension scheme for armed personnel and additional funds for banks’ capital infusion needs.

Prima facie, these will put pressure on the government’s finances but there is sufficient headroom within the budget. Savings from low commodity prices, higher indirect tax collections and dividends or surpluses should help bridge the gap. In addition, given the government’s emphasis on fiscal consolidation, risks of overshoot of targets will be mitigated by expenditure cuts to stay within the -3.9% of the gross domestic product (GDP) red line. The RBI has also assumed that commitment to fiscal targets will help keep inflation and inflationary expectations in check.

US economy

In the US home prices have, for all intents and purposes, stopped rising, and manufacturing is back in doldrums. While consensus expects only a modest 200,000 non-farm payrolls were created in September and most have stopped talking about big revisions to the initial August reading of 173,000, risks must be to the downside for both statistics given the weak data flow of the past six weeks and even weaker sentiment regarding future outlook.

Fixed income

Global equity markets finally staged a concerted rally with the S&P 500 up by 1.9%.

However, lingering concerns on the global economy is unlikely to be shaken off just yet. Meanwhile, the VIX (volatility index) remains elevated at 24.5. A rally in equity markets and the rates space prompts wariness as one market is likely to be wrong. In any case, the market is not convinced that the Federal Reserve hikes will be forthcoming this year.

Against a backdrop where inflation is low and rate hike expectations are receding, there is little paying interest for US dollar swaps. This is probably part of the reason why dollar swap spreads (dollar swap rates less US treasury yields of similar tenor) have collapsed in recent weeks.

Meanwhile, the erosion of foreign reserves as emerging markets smooth out volatility in their currencies could have contributed to elevated US treasury yields (relative to swaps) as central banks sell.

Much will now depend on whether the sell-off in emerging market currencies is done.

Edited excerpts from report named Economies, Currencies, Rates: Daily Breakfast Spread, by DBS Bank

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Published: 01 Oct 2015, 07:07 PM IST
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