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Economic Alert: India – Budget Target Is A Positive; Quality Could Suffer

By Standard Chartered Bank

Summary

The positives in India’s FY17 budget were strong: Much to the surprise of the markets, including us, the finance minister announced a tough fiscal deficit target for FY17 (year ending March 2017) of 3.5% of GDP (FY16: 3.9% of GDP). This is in line with the original fiscal consolidation plan and comes despite a challenging economic environment. We believe adherence to the original target for FY17 will enhance both policy credibility and macroeconomic stability for India, a big advantage in today’s volatile global environment. With the government adhering to its promise, we expect the Reserve Bank of India (RBI) to reduce the repo rate at its 5 April policy meeting, if not sooner. An inter-meeting cut cannot be ruled out. The ongoing focus on select infrastructure projects, such as roads and railways investment, is another positive.

Aspirations to improve the quality of fiscal consolidation are unlikely to be realised: We expect the government to adhere to the 3.5% of GDP fiscal deficit target irrespective of any adverse developments, much in line with the trend since FY14. However, we think the government will have to reduce its capital expenditure (excluding for roads) in FY17 to meet this target. This is because we think the government has (1) overestimated one-off receipts by 0.35-0.40% of GDP; (2) underestimated recurrent expenditure related to the implementation of the seventh pay commission and food subsidies by 0.10-0.15% of GDP; and (3) provided a lower-than-expected allocation for bank recapitalisation which could increase over FY17.

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