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February 17, 1999
Pre-Budget poll: Analysts see fiscal deficit of 7 pc of GDP
Gautam Chakravarty in Bombay
The net borrowings of the government in the next fiscal year will be in region of Rs 720 billion to Rs 800 billion though the Union Budget may project a more optimistic picture, according to leading financial analysts.
Expressing concern over the worsening fiscal situation, they said that the high growth in revenue receipts between 1994 and 1998 was arrested in 1998-99 by the economy slowdown while the coalition government at the Centre had been unable to control expenditure by pushing through any stern measures.
Consequently, the fiscal deficit for 1998-99 is expected to increase to around seven per cent of the gross domestic product from the previous year's level of 6.1 per cent.
Assuming a 12 per cent increase in nominal GDP for the year 1999-2000 and with no clear signs yet of an improvement in industrial activity, fiscal deficit for the next year would be 6.80 per cent, they predicted.
Analysts from J P Morgan Guaranty Trust said that the most disturbing trend was the extent of the deficit being funded out of market borrowings which increased from 49 per cent in 1997-98 to 57 per cent in 1998-99 and expected to hit 60 per cent in 1999-2000.
Reasoning out the relative stability of interest rate during the year in spite of a near 50 per cent increase in market borrowings, they said that the inflow of Rs 179.45 billion from Resurgent Indian Bonds in bank deposits improved the liquidity situation and about 30 per cent of the net market borrowings were absorbed by the Reserve Bank alone.
With nearly 80 per cent of market borrowings being financed by banks and the RBI, interest rates will be determined to a very large extent by banks' deposits growth and the RBI's comfort level with monetising progressively higher amounts of the deficit. Both these factors might not be as favourable in the next fiscal, they felt.
Analysts from the ICICI Securities Limited said that the gross borrowing programme of the government for the next fiscal would be above Rs 1 trillion (1000 billion = 1 trillion; 1000 million = 1 billion). Lower tax collections on the back of slowdown in industry and trade is likely to lead to substantial fiscal slippage and this pushed the primary deficit in 1998-99 to over Rs 320 billion compared to the target of Rs 160.25 billion.
The credit offtake has not picked up till the end of January and the incremental credit-deposit ratio during the year is at 30.3 per cent compared to 45.8 per cent in the corresponding period last year.
Tax collections continue to be sluggish as the excise and customs collections totalled Rs 727 billion during the April-January (1998-99), 11.5 per cent below the targeted Rs 821.60 billion. Direct tax collections have been good, growing at 17 per cent compared to the 15.8 per cent target.
The market is currently sitting on large long positions which have been financed out of borrowing in the overnight market and from the RBI refinance. The net monetised deficit is also effectively higher by the amount of utilised refinance since the RBI is financing banks and primary dealers to take long bond positions.
The only way a liquidity squeeze can be avoided will be through generation of surplus by increase in bank deposits, they said.
A continued increase in credit offtake from banks in coming months can worsen the liquidity situation further and lead to a gradual tightening in interest rates.
Hopes of a repo rate reduction further diluted since the RBI may prefer to delay this decision until the Budget announcement.
Marketmen felt that in the face of slack economic activity and hence relatively poor revenue collections, the fiscal deficit and market borrowing requirements for next year are expected to be 40 per cent higher than the Budget estimates for 1998-99.
While the market is well apprised of the weakening fundamentals, long positions were largely a technical, cashflow driven trade. However, the leveraged positions of banks and PDs which are being funded primarily from refinance drawn down from the RBI, are a serious cause for concern, they added.
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