Indian government likely to stick to fiscal deficit target of 3.5 pct of GDP in FY 2017, says ANZ

The Indian government is likely to stick to its fiscal deficit target. According to an ANZ research report, the government is expected to keep the fiscal deficit target of 3.5 percent of the GDP for the fiscal year 2017. Disturbances to corporate tax collections because of demonetisation are likely to be countered by solid excise collections and curtailments in capital expenditure.

For the fiscal year 2018, the Indian finance minister is expected to set a fiscal deficit target of 3.3 percent, which is 30 basis points higher than what was initially highlighted in the government’s fiscal consolidation roadmap. Fiscal expansion is believed to be too crucial to offset the effect of demonetisation on consumption demand, especially in the rural segment, stated ANZ.

The government is also expected to use the budget to advance reform momentum. A close watch would be kept for the measures relating to the increased digitisation in the economy, the roadmap for simplification of direct tax structure, concentration on cash intensive sectors to ease the pain of demonetisation and roadmap for public sector bank recapitalization.

“We maintain our FY2018 GDP forecast of 8 percent, driven by a recovery in consumption demand on the back of a strong rural impetus in the budget”, added ANZ.

The Reserve Bank of India, in its upcoming monetary policy meeting on 8 February is expected to cut the interest rate by 25 basis points in the midst of a benign inflation trajectory and to counter the near-term negative growth effect of demonetisation.