Room for monetary easing: Aditi Nayar

The Budget has crucially reinforced the government's commitment to fiscal consolidation. It did not deviate from the fiscal deficit target of 3.9 per cent in the Budget Estimate for 2015-16, despite lower-than-expected gross domestic product, or GDP, growth and a substantial shortfall in disinvestment inflows and direct tax revenues.

Despite additional outgo on account of higher pay, the Budget stuck to the previously announced fiscal deficit target of 3.5 per cent. This would dampen bond yields and improve the likelihood of monetary easing, although we expect it to be restricted to 25 bps in 2016.

The growth projections for tax revenues in the Budget appear realistic. The estimates for proceeds from disinvestment and spectrum sales, though, may prove optimistic. At the same time, increased allocations for the rural and infrastructure sectors are likely to support economic growth. A healthy 12 per cent rise in resources to be transferred to the states in 2016-17 is a positive, although it is not yet clear how this will be achieved. On the downside, with little room to augment capital spending, we expect a slippage in the quality of the fiscal deficit in 2016-17.

Aditi Nayar
Senior economist ICRA