Extra borrowing not for further spending; see FY18 fiscal deficit at 3.5-3.6%: Pros

Talking about the trends for 2018 with an eye on additional borrowing by government and its impact on overall macros, CNBC-TV18 spoke to Tushar Arora Senior Economist, HDFC Bank and Indranil Pan, Chief Economist, IDFC Bank.

The government will borrow additional Rs 50,000 crore during January-March, raising the gross market borrowing target of the government to Rs 6.3 lakh crore for the financial year 2017-18.

Pan said it is clear that the fiscal deficit of 3.2 percent will not be met in FY18 but it would around 3.6 percent and for the next year government would want to show 3.3 percent target in terms of consolidation path laid down by FRBM.

Arora said there are various tools to meet the fiscal deficit target but the question is not about whether they will meet the target or not, but more important question is whether they will cut back the spending in a year when the economy is recovering from lows of demonetisation and GST.

Government seems to be sending out a message that they will continue on whatever spending they are doing and breach the fiscal deficit target in a minor way. The bank expects it to be around 3.5 percent of GDP.

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Indranil Pan

Chief Economist|IDFC Bank

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According to him, in a year where when there are going to be general elections later on and when private investment cycle is not doing well, it makes sense for government to continue supporting the economy.

From the bond market perspective, Arora said they were expecting a minor breach and additional borrowing to the tune of Rs 40,000 to Rs 50,000 crore. So for bond markets it could be a bit negative but as far as growth is concerned, the support from government stays, which is good.

According to Arora, this additional borrowing is not for further spending but for filling the gap of lower revenue collection.

Giving a trajectory for bond yields, Pan said they are likely to firm up further, especially with further softening from the RBI in terms of rates is thing of the past.

For full discussion, watch video