SBI arm for higher fiscal deficit target to boost investment

Analysts and economists at the nation's largest lender SBI today joined the call for stretching the fiscal deficit target by a few notches so that the government can boost capex without impacting the fiscal consolidation process.
"We believe, the government must step up capital expenditure meaningfully to stimulate investment. We firmly believe fiscal deficit for 2015-16 should be set higher at 3.8 per cent of GDP, up from 3.6 per cent envisaged in the current Budget. This is unlikely to impact fiscal consolidation," the economic research arm of SBI said in a note.
The fiscal consolidation roadmap set by the previous Government, which was retained by the current administration, had pegged fiscal deficit at 3.6 per cent next fiscal and 3 per cent in 2016-17. For 2014-15, the target is set at 4.1 per cent.

Many economists, including ex-Reserve Bank Governor Bimal Jalan, are calling for pump priming the economy by stretching the Government balance-sheet and sprucing public investment in the infra space, which can help revive growth.
A recent media report said the Government might be looking at stretching fiscal deficit target of 3.6 per cent as part of a "fiscal glide" path to be announced in the Budget, wherein growth-inducing public expenditure can be prioritised.
The note by SBI Research said the Government will cap the subsidy payments at 1.7 per cent of GDP for next fiscal, which will create additional room to scale up the capex at 1.5 per cent of GDP, up from the present 1 per cent.

Analysts have said savings from the steep fall in crude prices could be 0.80 per cent of GDP, or over USD 50 billion, this fiscal by way of lower import bills.

The SBI report said the capital expenditure has a high "multiplier effect" of 2.45, wherein every rupee increase in capex will translate into a Rs 2.45 increase in GDP.
The note said the government will maintain its gross borrowings at Rs 6 trillion for 2015-16, while the net borrowing through dated securities will be Rs 4.28 trillion. "Our estimate of short-borrowings is Rs 40,000 crore for FY16 given the current market appetite."

It, however, assumed the fiscal deficit (the gap between government expenditure & revenue) to be maintained at the targeted 3.6 per cent for the calculations on borrowings. A projected drawdown of cash balances at Rs 25,000 crore has also been assumed.