Indian markets are examining one government metric carefully as December winds down. Will Finance Minister Arun Jaitley manage to hold on to his fiscal deficit target of 3.3 per cent of GDP in 2018-19? A larger gap could mean more government papers in the market, which would lower their price and hurt the income of funds that have invested in these papers.
Latest data from the Controller General of Accounts notes that the government has already exceeded its deficit target by over 4 per cent after seven months. Jaitley has been prudent in his expenditure, but revenue, especially from the Goods and Services Tax, has undershot its target of Rs 1 trillion a month. There is hardly any other source to make up the gap since receipts from non-tax revenue is already stiff at Rs 1 trillion and unlikely to show any surplus.
This is why the government and the RBI engaged in a public spat to whittle down some of the reserves of the latter. Even half a trillion rupees more from the RBI could keep the budget arithmetic in shape. Jaitley’s borrowing calendar notes he will pick up 10.64 per cent less from markets in 2018-19 compared with last year. The only possible option to do this and yet keep the fiscal deficit unchanged is to cut capital expenditure —and that for a demand starved economy is not great news.