With sops, 3.2-3.3% fiscal deficit looks achievable in FY20: Suvodeep Rakshit, Kotak Institutional Equities

With respect to fiscal math, two challenges that any government which comes to power and implements farm sops or quasi universal basic income will face are that of identification and that of financing it, Suvodeep Rakshit, Senior economist, Kotak Institutional Equities, tells ET Now.

Edited excerpts:

Talking about Budget expectations, what happens to the fiscal math? How does the government protect it in the wake of the expectations on major sops for the farm sector?

If you are looking at the budget math, in FY19, we are looking at 3.5% as a percentage of GDP. If you are looking at FY20, we are looking at around 3.2% because what the government would ideally want to do is show the path of fiscal consolidation. When we talk about the theme of the budget, etc, we have to remember it is an interim budget.


By convention we have never had major policies or programmes being announced. However, given that there is a backdrop of rural distress especially in the farm sector that has been festering for the last couple of years, the government may have some leeway in terms of announcing certain programmes.

It could be in the form of direct farm investment on the lines of the Telangana model or it could be a quasi universal basic income which was highlighted in The Economic Survey. Whatever it is, there are a couple of points that we should note when we are looking at it.

With respect to the fiscal math, two challenges that the government will have or any government who comes to power and implements it will have is that of identification and second is that of financing it. The identification problem is something that will be quite serious because if there are leakages and improper identification, then the programme does not really reach out to the targeted beneficiaries.

Then comes the fiscal math when you are talking about in terms of financing because the cost will be significant. Now whether the cost will be taken in the first year itself or whether it will be a cost will be incurred on the go is something that the government will have to look at.

In terms of rough calculations, if you are looking like at a below poverty line kind of transfer and that too say the poorest of the poor, say a 40% of the BPL population being addressed, you would be looking at a cost nearly about 0.5% of GDP. Now if we were to incur it at one go, it would be trillion rupees or 0.5% of GDP or somewhere around that mark. If it is an on the go and money being spent as and when it comes without directly budgeting the entire amount at the first go, 3.2-3.3% fiscal deficit to GDP looks achievable in FY20.

What if there is high fiscal slippage? What would it mean for bond yields and by how much do you really see the government borrowing increase? Is this going to really impact their rating or their view on India too?

The bond market is already factoring in fiscal slippage risk very significantly over the last couple of weeks and that mood does not change immediately. If you look at the budgeting math, even with the 3.2% of fiscal deficit to GDP being budgeted in FY20, the gross borrowing amount will be significantly higher than the FY19 gross borrowing amount. Until and unless, there are some kind of fiscal leeway that the government has in terms of revenues or in terms of sources of fiscal deficit financing.

Already the weekly issuances will be on the higher side from the initially budgeted numbers. From yields and fiscal perspective, I would be on the cautious side. Having said that, obviously the expectation is that the RBI will cut rates and liquidity will be on the easier side. If the RBI thinks that the liquidity should be towards neutral, all these taken together would still be on the cautious side with the bond yields trading currently on the new 10-year at around 733. It should be around that handle, if not slightly higher.

How do you foresee the trend on the currency, the rupee?

The rupee is more linked now. Obviously, the domestic factors have a bearing on it but the global factors like crude or the dollar strength or weakness matters more for the rupee currently. From that perspective, if the crude does not really spike up from the current levels, an average of around 71 for FY20 looks achievable.