Nomura sees fiscal deficit slipping to 3.7% in FY20

Mumbai: The Union Budget on February 1 is likely to reveal fiscal deficit slipping by around 0.4% to 3.7% in FY20 due to sharply lower nominal growth, slowdown in tax revenue growth and lower-than-anticipated disinvestment proceeds. The government had budgeted FY20 fiscal deficit at 3.3% of GDP in the last Union Budget.

"The Union Budget on 1 February is likely to reveal fiscal deficit slipping around 0.4% of GDP off target to 3.7% in FY20. Amid a challenging growth environment, the government may find itself having to choose between correcting this slip in FY21, or on the other hand, using fiscal activism to support growth, but at the cost of other macro risks," said Nomura.
The brokerage expects the government to set fiscal deficit target for FY21 at 3.4% of GDP.


Nomura expects the Budget to prioritise investment over short-term consumption demand, announce measures for boosting housing demand and attract more long-term risk capital. The brokerage said it expects the Budget to be largely neutral for both growth and inflation.

Nomura expects capital expenditure at 1.79% of GDP in FY21 versus 1.66% expected in FY20; with focus on roads, railways and power.

Whiile there may be temptation for the government to take steps like lowering personal income tax rates, the broader theme of fiscal conservatism is likely to prevail, said Nomura.

"Rather than personal income tax cuts, we expect more measured steps like possible tweaking of the basic exemption limit, or deductions against approved investments or mortgage interest payments," said Nomura.