India’s Cautious Budget Puts Onus On Central Bank To Spur Growth
The move is intended to help reverse weakening investment flows that have led to a drop in economic growth that threatens to take the shine off Prime Minister Narendra Modi’s recent landslide general election victory.
The Indian government’s annual budget statement on Friday included measures aimed at improving the investment climate but lacked any direct steps to stimulate a sagging economy, adding to pressure on the central bank to provide more immediate help.
Finance Minister Nirmala Sitharaman stuck to the government borrowing target announced in an interim budget in February and cut the fiscal deficit target to 3.3 per cent of the gross domestic product for the current year ending March 31, 2020, from an earlier, upwardly revised target of 3.4 per cent. Some forecasters had expected a deficit as high as 3.7 per cent. Economists questioned whether the cautious budget was enough to counter severe headwinds, including weak monsoon rains, debt-burdened
banks and trade tensions with the United States. “There was widespread expectation of a stimulus to combat the current slowdown,” said Anagha Deodhar, economist at ICICI Securities.
“The budget did not announce any stimulus. On the contrary, (it) raised some of the taxes.”
She added that the downward revision of the fiscal deficit target was surprising.
Sitharaman, presenting her first budget since her appointment to the finance ministry last month, did propose giving foreign investors a bigger role in India’s giant insurance and aviation sectors. The move is intended to help reverse weakening investment flows that have led to a drop in economic growth that threatens to take the shine off Prime Minister Narendra Modi’s recent landslide general election victory. “India’s government announced a lower fiscal deficit target for fiscal 2020, while maintaining its support for growth and incomes. Achieving these competing goals will be very challenging,” said Gene Fang, associate managing director, Sovereign Risk Group at Moody’s Investors Service. Benchmark 10-year bond yields dropped as much as 19 basis points intraday to 6.56 per cent following the release of the deficit numbers, which suggested India was planning to keep its borrowing under control.
It opens up the possibility that the Reserve Bank of India (RBI) may cut its benchmark rates by more than 25 basis points at future meetings, according to some traders and analysts.
“No fiscal slippage means growth is now in RBI’s domain, so more than 25 bps rate cuts possible,” said a senior fixed income trader at a private bank, who declined to be identified.
“Also, sovereign bonds may mean lower domestic issuance and not just this fiscal year but going forward this may be a new trend.”Reuters