The State Bank of India's (SBI) Economic Research Department in its report has claimed that fiscal deficit target of 3.2 percent is "on point", adding that projections of revenue slippage in FY18 are "grossly misconstrued".
The report, authored by Dr Soumya Kanti Ghosh, Group Chief Economic Adviser of SBI also stated that the above "doomsday predictions flunk the test of logical reasoning".
"As per our estimate, there may still be a shortfall of Rs. 1.1 lakh crore in the revenue receipts. To manage the fiscal deficit, the government needs to cut expenditure substantially. We estimate that government may cut around Rs. 70,000 crore from the capital expenditure," noted the report.
However, the good news is that budgeted disinvestment receipts are on track to realizing Rs. 72,500 crores. At current trends, it is likely that for the first time after FY10 that disinvestment target is likely to be achieved.
It further noted that the government accumulated a total of Rs. 40,491 crore in the National Small Saving Fund (NSSF) during the first five months of this fiscal, and could thus receive Rs. one lakh crore in small savings in FY18, enabling a buyback of Rs. 75000 crore which was contingent upon that. This, in turn, the report noted, implies that the government would be able to meet its net borrowing target of Rs. 3.48 lakh crore.
While a lower-than-estimated budgeted nominal growth of 11.8 percent will not translate to higher fiscal deficit, Ghosh, in his report estimated that even if the nominal growth declines significantly in FY18, fiscal deficit will be impacted by, at the most, 10 basis points in upward direction.
Additionally, inflation numbers in October are likely to range between 2.9 and 3.1 percent, with a downward bias, and could help a big bond market rally. If this materialises, these could be a big opportunity for market participants.
A decline in yields could provide the much needed succour to banks in the midst of provisioning for balance sheet clean up and lower credit growth, the report further noted.
In the budget for FY18, Rs. 72,500 crore has been targeted from disinvestment, including Rs. 46,500 crore as minority stake sale in Central Public Sector Enterprises (CPSEs), Rs. 15,000 crore from strategic disinvestment and Rs. 11,000 crore from listing of insurance companies.
In the current year so far, the government has already raised about Rs. 19,759 crore through minority stake sale in CPSEs and strategic disinvestment. Further, the takeover of HPCL by ONGC is projected to garner about Rs. 30,000 crore and the disinvestment in GIC raised Rs. 10,662 crore for the government.
The report also noted that the government plans to sell its entire stake in Hospital Service Consultancy Corporation (HSCC), Engineering Projects (India) Ltd (EPI) and National Projects Construction Corporation (NPCC) to a similarly-placed CPSE.