Due to significantly lower nominal growth, a slowdown in tax revenue growth and lower than expected disinvestment proceeds, Nomura the government is likely to reveal a fall in fiscal deficit by around 0.4 percent to 3.7 percent for the current fiscal year at the upcoming Union Budget 2020 presentation.
For the fiscal year 2019-20, the government had budgeted fiscal deficit at 3.3 percent of GDP (gross domestic product).
"The Union Budget on 1 February is likely to reveal fiscal deficit slipping around 0.4% of GDP off target to 3.7% in FY20. Amid a challenging growth environment, the government may find itself having to choose between correcting this slip in FY21, or on the other hand, using fiscal activism to support growth, but at the cost of other macro risks,' said Nomura, a Japanese financial services company.
Further, the brokerage expects the government to set its fiscal deficit target for the financial year 2020-21 at 3.4 percent of GDP. It expects capital expenditure at 1.79 percent of GDP in FY21 when compared to 1.66 percent expected in FY20; with focus on roads, railways and power.
Nomura expects the Budget to prioritise investment over short-term consumption demand, announce measures for boosting housing demand and attract more long-term risk capital. Overall, the Budget is expected to be largely neutral for both growth and inflation, while sticking to the fiscal conservatism theme.
"Rather than personal income tax cuts, we expect more measured steps like possible tweaking of the basic exemption limit, or deductions against approved investments or mortgage interest payments," Nomura said.