(Mint file)
(Mint file)

RBI bonanza allays fiscal concerns, but room for stimulus stays limited

  • Fiscal slippage issues have receded to some extent courtesy surplus funds transfer by RBI
  • With the consolidated fiscal deficit staying high, there is limited scope for a further stimulus

In line with the recommendations of the Bimal Jalan Committee, the Reserve Bank of India (RBI) will transfer 1.76 trillion to the government this fiscal year.

Since the government has shown a commitment to fiscal consolidation, economists expect excess money to be largely reserved to meet the expected shortfall in tax revenues.

Of course, some of these funds may also be used to recapitalize public sector banks, which the government last week decided to disburse upfront.

This means, given the inadequate goods and services tax (GST) collections, concerns over fiscal deterioration may have been allayed to some extent for now. However, what this also means is that the legroom for major stimulus measures from here on remains limited.

As per estimates by Anubhuti Sahay, senior economist at Standard Chartered Bank, overall, the government is likely to receive additional revenue inflows of around 60,000 crore. “This is likely to assuage worries about fiscal slippage—we estimate that the FY20 fiscal deficit target faced a slippage risk of 0.5% of GDP on ambitious tax targets. As most of the excess revenue is likely to be used to contain any fiscal slippage in FY20, room for fiscal stimulus remains limited, in our view," she said in a report on 27 August.

Bonds rallied in early trade on Tuesday, adding to the gains on Monday, in response to the government’s fiscally prudent announcements last Friday. However, as the day progressed, bonds erased earlier gains. As a result, benchmark 10-year yields closed at 6.53%, which was lower compared to 6.57% on Friday.

Economists at Kotak Institutional Equities said in a Tuesday morning note to its clients: “While the initial reading could be positive for GSecs, fiscal slippage risks will continue to weigh on yields." Their view is that “fiscal slippage risks remain given our estimated shortfall of around 1.5 trillion in goods and services tax (GST) revenues. If direct taxes disappoint, too, fiscal pressures will intensify (amid slowing growth)". GSecs stands for government securities.

Although GST collections crossed the 1 trillion-mark in July for the third month in a row, economists said the pace of growth is insufficient to match the targeted 6.63 trillion for this fiscal year, as far as the government’s share goes.

Arvind Chari, head of fixed income and alternatives at asset manager Quantum Advisors Pvt. Ltd, said: “The fact that there was no fiscal stimulus announced last week by the finance minister in her packages was comforting for the bond market. We do hope that the government uses this windfall to balance the fiscal for this year instead of using it to announce some spending programme. Total government related fiscal spending is already estimated at 8.5-9% of GDP. We don’t need a stimulus."