Budget's revenue targets achievable, says Goldman Sachs

February 02, 2022 13:23

Illustration: Dominic Xavier/Rediff.com

'The Indian government in its annual budget targeted a reduction in the fiscal deficit to 6.4% of GDP (GSe: 6.3%, Consensus: 6.0%) in FY23[1] from a projected 6.9% (GSe: 6.8%, Consensus: 6.8%) in FY22, revised higher from 6.8% budget estimate (BE).

'The budgeted fiscal consolidation will be primarily driven via a decrease in total expenditure as a percentage of GDP, especially current expenditure, while capital spending was increased from 2.6% of GDP in FY22 to 2.9% in FY23.

'Overall, the revenue targets look achievable to us,' says Goldman Sachs' research report, Asia in Focus: India: A growth focused budget, with higher borrowing.

'The thrust of the government's policies lie on infrastructure creation, and reviving the rural economy. To encourage exports, the government proposed to replace the existing law governing special economic zones with a new legislation to enable states to become partners in the hubs, the report says.

'The net market borrowing in FY23 is budgeted at INR 11.6tn, higher than our already large borrowing expectation. This, along with borrowings by states, means that the combined issuance for the Centre and states is likely to remain elevated.

'With no mention of India's inclusion in global bond indices in the budget speech today, we stick to our base case assumption of an announcement of India's likely inclusion into the GBI-EM Global Diversified Bond Index in Q4 2022, with actual inclusion to begin in early 2023.

'With elevated supply, and comparatively lower incremental demand from natural buyers, we estimate that the RBI will have to continue to support government bond purchases in FY23, despite domestic liquidity constraints,' Goldman Sachs said in a press release.

'We remain bearish on INR longer-dated rates in the medium term due to three key reasons: a) unfavourable supply/demand dynamics in Indian bonds, b) our view on monetary policy normalization in India in 2022, and c) our US economics team's view of five Fed rate hikes by the Fed in 2022,' Goldman Sachs said in the release.

To read Goldman Sachs' research report, Asia in Focus: India: A growth focused budget, with higher borrowing, click here.

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