India’s fiscal position will worsen ahead of polls: UBS Report

Mumbai: Calling for a tight monetary and fiscal policy amidst global uncertainties and upcoming general elections, a foreign brokerage has warned of worsening fiscal position due to poll-related spending spree before next May when the new Parliament has to be instituted.

The firm, Swiss brokerage UBS, has projected the consolidated fiscal deficit for FY19 at 6.5 per cent of GDP against a budgeted 5.9 per cent, which is only 10 bps lower than FY18.

“Specifically, there is a risk of the Centre breaching its fiscal deficit target of 3.3 per cent of GDP by at least 20 bps in FY19 unless it adjusts expenditure or non-GST revenue collection is higher than budgeted,” UBS said in a note.

Noting that consolidated fiscal deficit was already stretched at 6.6 per cent of GDP in FY18, it said, “We see a risk that the combined fiscal deficit will remain elevated at 6.5 per cent of GDP in FY19 against a budgeted 5.9 per cent.”

Even though growth seems to be normalising, deteriorating macro-economic imbalances are again posing a concern to the domestic economy as the risks of the consolidated fiscal deficit missing the target for FY19 rises, the firm added.

Though the Centre has been committing itself to fiscal consolidation, the lower than-expected GST collection, rising states’ fiscal deficits, and the risk of populist spending ahead of the 2019 elections are keeping markets on tenterhooks regarding possible fiscal slippage, it said.

As global uncertainties rise, crude prices escalate, emerging markets that are running twin deficits are likely to face heightened financial market volatility as well as downside risks to their growth outlook.

“The key is to ensure macro-economic stability so that a growth recovery can be sustained in the medium-term and is not sacrificed for the sake of short-term growth and inflation dynamics,” it said.

While the monetary policy committee has already tightened the policy rate by 50 bps since June, the ball is now in the government’s court to ensure fiscal discipline is maintained in a pre-election year, it added.

States also need to fund additional spending needs including farm loan waivers, higher wages and salaries, which are likely to keep their balance sheets stretched.

Projecting a below estimate GST collection in FY19 (monthly run rate of Rs 1,02,700 crore), it said the run rate during the first four months was only around Rs 97,500 crore.

Risks involved
“Building in tax buoyancy in monthly collections and incorporating the recent cuts in GST rates for various commodities, we see a risk of a Rs 25-30,000 crore or 0.15 per cent of GDP shortfall in GST mop up in FY19, unless tax compliance picks up significantly,” the report from UBS said.

Though the weaker fiscal position and higher public debt relative to peers do not pose any immediate threat to the debt sustainability, it added, “We believe they are inflationary.”

According to RBI, an increase in the fiscal deficit-to-GDP ratio of 100 bps can lead to a permanent increase in inflation of about 50 bps.