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Fiscal Profligacy Could Cost the Economy


When the Interim Budget was being delivered, many were jubilant as the government had taken care of the middle class, farmers and workers. Stock markets were buoyant, on announcement of tax sops for the Middle Class. Only when it became clear that it was not a change in the tax slab and it was only a rebate, reality began to sink in.


A couple of hours later, it was clear that the government may not be able to meet the fiscal deficit numbers. Sovereign rating agency, Moody's sounded cautious.

"Taken together, it doesn't really bode well for their medium-term fiscal consolidation targets," said Gene Fang, associate managing director, sovereign risk group, Moody's Investors Service. "From that perspective we would say, on balance, it's credit negative."

There is no major additional source of revenue and the revenues from divestment and dividends from RBI may not match the government's expectations.

Fiscal Profligacy Could Cost the Economy

The dividend transfers this year itself, could be way less than the Budgeted amount. The estimated stake sale in government owned entities of Rs 80,000 crores is way over stretched.

"The chances are that these measures are going to have some fiscal cost and that unless there are cuts elsewhere or offsetting revenue increases... I think that in the medium term it may be more challenging to meet their fiscal deficit targets for next year," Fang said, according to a Reuters report.


The government has also increased the gross market borrowings for the current FY19 fiscal by about Rs 40,000 crore. What is interesting is that the borrowings have increased by a whopping Rs 1.4 lakh crore for FY20.

Bond yields have surged and the rupee too has fallen post the announcement. In fact, banking stocks fell as rising bond yields is not good news for the markets. The RBI may hold interest rates steady in its next policy meet, as against an anticipation of a cut in interest rates.

Clearly, the next government is likely to find it difficult to contain the fiscal deficit going by the populist measures.

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