Extra borrowing sends rates up, forget a rate cut PDF Print E-mail
Friday, 29 December 2017 04:00
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If bond markets don't settle, even the slim prospect of rate cut is over; cut in small savings rate will help though

With the government looking to tap the markets for an additional Rs 50,000 crore, the fiscal deficit for 2017-18, pegged at 3.2% of GDP, now looks like it could slip by about 25-30 basis points. While economists may fret, as may the central bank, clamping down on expenditure at a time when the economy is just about coming out of a trough is not a good idea. The immediate fallout of Wednesday’s announcement is, of course, the sharp spike in bond yields which ran all the way up to 7.399% on Thursday, before closing the session at 7.396%, an 18-month high. That’s a huge disappointment for an economy that’s on the mend; industry has been counting on interest rates holding steady, if not going down in sync with lower inflation. However, that seems very unlikely now because the Reserve Bank of India (RBI), which has been red-flagging the elevated deficits of state governments, will definitely not be in a mood to turn accommodative given the Centre’s finances are not exactly in great shape. While low interest rates alone cannot resuscitate investment, they do help ease the pain, and smaller companies in particular stand to benefit a lot if borrowing costs fall even by 10-20 basis points. Moreover, consumers too are prompted to spend if interest rates are lower.

It appears likely that revenues from excise and service tax could be short of the targeted Rs 6.7 lakh crore and hence the need for additional borrowings. GST collections for November slipped to Rs 80,808 crore inclusive of cess and IGST, 15% lower than in July, and total collections for August-November now stand at around Rs 4.4 lakh crore. So far, net direct tax collections have been, by and large, on track at Rs 4.8 lakh crore in the April-November period as against the estimated collection for 2017-18 of Rs 9.85 lakh crore. This is an encouraging number, given the twin disruptions from demonetisation and the rollout of the GST on July 1, and it helps that collections are typically higher in the second half of the year. Nonetheless, it would be premature to assume the target will be met and, at this stage, it appears gross tax collections will come in closer to Rs 18.3 lakh crore against the budget estimate of Rs 19.1 lakh crore. The big bonus for the government this year has come from the mop-up from disinvestments which could turn out to be bigger than the targeted Rs 72,000 crore; three-fourths of this is already in the bag. However, on the other side, RBI has remitted a smaller quantum of dividends—less by about Rs 30,000 crore. Moreover, receipts from telecom providers are likely to be around Rs 10,000 less than pencilled in. The bad news is that the government has already spent a big chunk of the Rs 21.5 lakh crore it had planned to—much of it on subsidies—and the fiscal deficit for April-October had hit 96.1% of the target of Rs 5.46 lakh crore. Trimming whatever is left of the expenditure budget, at this stage, would only hurt the economy.


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