With a sharp cut in growth estimate, should RBI trust govt's fiscal deficit target?

RBI Governor Shaktikanta Das pointed out earlier today that the government had already made a statement that they would adhere to its fiscal deficit target

The Reserve Bank of India (RBI)'s economic growth projection for 2019/20 went terribly wrong. The central bank has revised downwards its gross domestic product (GDP) estimate for 2019/20 to 6.1 per cent from 6.9 per cent earlier. It had earlier projected GDP in the range of 5.8-6.6 per cent for the first half (April-September) of 2019/20, whereas the actual figure for the June quarter of 2019/20 came out at 5 per cent. There are now concerns over the fiscal deficit numbers. Should RBI trust the fiscal deficit numbers that the government has targeted for 2019/20 (3.3 per cent of GDP) in the backdrop of material changes that have taken place over the last few months?

RBI Governor Shaktikanta Das pointed out earlier today that the government had already made a statement that they would adhere to its fiscal deficit target. "We have no reasons to doubt the commitment of the government," said Das, adding that the government has several sources of revenues to bridge the shortfall. However, market participants are worried that the slowdown in the economy coupled with recent corporate tax cuts may widen the fiscal deficit. There is a likelihood of fiscal deficit slipping to 4 per cent. A higher fiscal deficit could be inflationary for the economy.

Corporate tax rate creates a big hole

The stock market is nervous as the government has taken a big hit in tax revenues of the order of Rs 1.45 lakh crore in 2019/20. The GST collections have also not been on the expected lines. With the flagging growth (RBI itself has lowered the GDP estimate to 6.1 per cent), there is every possibility of fiscal deficit number breaching the targeted 3.3 per cent of GDP in 2019/20.

Show me the money

Amid dwindling stock market valuations, the government is banking on disinvestment to raise over Rs 1 lakh crore. However, raising such an amount at lower valuations will be challenging. The government is unlikely to sell its stake at dirt-cheap prices.

There is also no assurance from the RBI whether it will pay interim dividend of Rs 30,000 crore, as was reported in the media. Governor Das quipped that he himself read about it in newspapers. In fact, the government is getting additional Rs 58,000 crore as part of the surplus capital this year.

Pushing expenditure off budget to meet fiscal deficit target

The public sector borrowings now amount to 6-8 per cent of the GDP. That is quite large. Former RBI Deputy Governor Viral Acharya had earlier pointed out in one of the monetary policy committee meetings before he quit the central bank. Ideally, the RBI should take a combined view of things to see fiscal slippages. There are also off-balance sheet borrowings by states. This is another big concern.

Oil and rupee depreciation to play spoilsport

The government reaped the benefits of lower oil prices in the past, but the fiscal deficit didn't see a drastic fall. It remained above 3.3 per cent of the GDP. But now the geopolitical situation is changing very fast. The trade and currency wars between the US and China are already taking a beating on currencies. The rupee has seen a gradual depreciation. The crude oil has been volatile since drone attacks on oil rigs of Saudi Arabia.

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