Budget 2019: Glided fiscal path a negative surprise, RBI to view it as inflationary, says Nomura

The interim finance minister Piyush Goyal on Friday presented a populist budget with global brokerage Nomura calling it an 'election budget'. The brokerage also sounded surprised over the fact that the government has glided from its fiscal prudence path and budgeted the fiscal deficit for financial year 2020 at 3.4 per cent of the gross domestic product (GDP) from the earlier estimate of 3.1 per cent. The government also missed its FY19 fiscal deficit target of 3.3 per cent of GDP and instead pegged it at 3.4 per cent. However, it did not change the original target of achieving 3 per cent of GDP by FY21. "The credibility of this target is now in question," says Nomura.

"Overall, the government presented an expansionary budget and prioritised populism over fiscal prudence (i.e., this is an election budget). The deviation from the FY19 fiscal deficit target and the "pause" on FY20 fiscal consolidation is a negative surprise, relative to our expectations," the brokerage said in a report. However, it acknowledged that the pause on fiscal consolidation was justified by the need for a farm package.

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Meanwhile, the government introduced a number of tax benefits aimed at boosting the disposable income of the middle class: tax rebate for individual taxpayers with income of up to Rs 5 lakh; the increase in standard deduction to Rs 50,000 from Rs 40,000 for employees, and a rollover of capital gains tax for two houses, among others.

Nomura estimated these tax benefits to the middle income class leading to a benefit of Rs 18,500 crore i.e. 0.1 per cent of GDP.

"The cumulative effect of the cash transfer to farmers and the middle income class will be a boost to consumption, but likely at the cost of crowding out private investments. This growth mix generally tends to be a negative for macro imbalances," says Nomura.

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The brokerage also pointed out that the Reserve Bank of India (RBI) may view the budget as inflationary and flag this as an upside risk to inflation. "The expansionary fiscal impulse, at the margin, negates the need for the RBI to consider monetary easing at this stage," it says.

Nomura expects the RBI monetary policy committee (MPC) to keep the repo rate unchanged in its policy review meeting due on February 7, but it may change the policy stance to 'neutral' from 'calibrated tightening', reflecting balanced growth/inflation risks.

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