India on track to meet 3.2% fiscal deficit target for FY18: UBS report

Central govt's fiscal deficit already reached 81% of full-year target in April to June of 2017-18 Q1

The Indian government is on track to achieving the fiscal deficit target of 3.2 per cent of GDP in the current fiscal year, says an UBS report.

The global financial services major said however that balance sheets of states remain "stretched".

The central government's fiscal deficit has already reached 81 per cent of the full-year target in the first quarter (April to June) of 2017-18.

"Accordingly, the cumulative fiscal deficit reached 2.6 per cent of GDP FYTD. That said, we believe the central government will be able to achieve the fiscal target of 3.2 per cent of GDP in FY18," UBS said in a research note.

The Centre's fiscal deficit narrowed from a peak of 6.5 per cent of GDP in 2009-10 (after the global financial meltdown) to 3.5 per cent of GDP in 2016-17 and is estimated to fall further to 3.2 per cent of GDP in 2017-18.

However, the states' fiscal position remains stretched, with the fiscal deficit rising from a low of 1.9 per cent of GDP in 2011-12 to 3 per cent of GDP (including UDAY, a scheme to turn around state electricity boards) in 2016-17.

The report noted that while pursuit of structural reforms, including a goods and services tax, bodes well for India's sovereign rating (currently at the lowest investment grade), the risk of a worsening consolidated (centre and state combined) fiscal position may act as a deterrent.

UBS said fiscal slippage due to an increase in populist spending by the government (including farm loan waivers announced by a few states) in the run up to the 2019 general elections remains a key risk for the government's fiscal deficit position.

"We believe the government's stretched combined fiscal deficit could crowd out investment both public and private, which tends to have a durable impact on overall growth vs. consumption and poses upside risks to inflation," it added.