Nomura expects fiscal deficit to climb to 6.4% of GDP

MUMBAI: Nomura has forecasted India���s fiscal deficit of 6.4% of GDP in FY10, higher than the budgeted 5.5%.

The Japanese major feels that the nominal GDP growth would slow to 8.0% in FY10, as against the government's projection of 11%. "As such, we expect revenues to be lower than the government assumptions for corporate tax revenue (up 6.0% y-o-y in FY10 rather than the government forecast of 10%), income tax revenue (7.0% versus 10.4%) and customs duty collections (-5.0% versus 2.0%)," says Nomura.

On a different note, Nomura expects another round of fiscal stimulus to be announced after the elections, taking planned expenditure to 5.5% of GDP in FY10 versus the government's budgeted 4.7%. "We therefore expect net borrowing to rise to Rs 3.2 trillion in FY10 versus the budgeted Rs 3.1 trillion. We expect borrowings through T-bills (of about Rs 300 billion) to partially fund the FY10 fiscal deficit," it explains.

On the policy implications of the interim budget, the foreign financial major believes that "fiscal policy is likely to enter a period of inactive limbo until after the election (to be held no later than May) due to the election code of conduct".

We continue to expect the RBI to cut both the repo and reverse repo rates by 50 basis points each in March and by a further 100 basis points by mid-2009. We also expect the cash reserve ratio to be lowered by 200 basis points to 3.0% by end-2009, says Nomura.