Government’s new stimulus package unlikely to upset fiscal math

Mumbai: North Block’s Diwali bonanza to add momentum to an economy rebounding from the strictest lockdown on the planet appears to have convinced even the biggest D-Street sceptics that New Delhi wouldn’t spend way more than it earns, comforting both the bond market and confirming for the broader audience the likelihood of a V-shaped economic recovery.The Dhanteras announcements might have some fiscal implications of course, but those are well within the limits budgeted by investors that rightfully anticipated higher federal expenditure in a crisis.“Adding the recently announced and perhaps some more fiscal stimuli, we may still be around 8% of GDP ultimately in the fiscal gap,” said Suyash Choudhary, head — fixed income, IDFC Mutual Fund. “This may not require any further enhancements to the borrowing programme. Compared with our expectations earlier in the year, the pace of government spending has been more controlled and the draw down on tax receipts may turn out to be less dire.”Consequently, IDFC MF estimated the central government’s deficit moving down to around 7 per cent of the GDP for FY21.Finance minister Nirmala Sitharaman announced an economic relief package of about Rs 1.2 lakh crore on Thursday in addition to the Rs 1.45-lakh crore boost unveiled a day earlier. This included a farmers’ subsidy of Rs 65,000 crore.The benchmark bond yield was little changed at 5.90 per cent Thursday.“The announcements today are significant reforms but unlikely to upset the fiscal math in any meaningful manner,” said Mahendra Jajoo, CIO of fixed income at Mirea Asset Investment Managers. “There are no major incremental concerns of overshooting the government’s borrowing target or fiscal deficits for now.”While production-linked incentives should lift tax collections, a one-off cash outgo may result in higher sovereign borrowing from the market.The central government is estimated to borrow a net of about Rs 11 lakh crore, including dated government securities and treasury bills. Although the farmers’ subsidy may trigger a sudden one-time expenditure, it could be well covered within the enhanced borrowing limits, dealers said.Depending on how much money is spent this year, the fiscal deficit can widen by up to 0.5 per cent of the GDP, assuming nothing else changes in terms of expenditures in the budget and the stimulus, according to Care Ratings. This is also based on the rating company’s estimate of real GDP falling by 8.2 per cent this year.“The allocation of subsidy on fertilisers would not be incurred this year,” it said in a note.

from Economic Times https://ift.tt/35osrAI