Budget 2016: Fiscal deficit target of 3.5% is positive for markets

Published: February 26, 2016 5:30:13 PM

Budget 2016: The 2015-16 Economic Survey has projected a growth rate of 7% - 7.75% for FY16 and long term growth is pegged at 8% - 10%. The FY17 numbers are realistic when seen against the backdrop of a slower global economy. We also believe that, these numbers have discounted the potential impact of any sharp rise in crude prices.

Budget 2016: The 2015-16 Economic Survey has projected a growth rate of 7% – 7.75% for FY16 and long term growth is pegged at 8% – 10%. The FY17 numbers are realistic when seen against the backdrop of a slower global economy. We also believe that, these numbers have discounted the potential impact of any sharp rise in crude prices. The inflation rate in FY17 is pegged at 4.5%-5% which, we believe is reasonable, in the light of low commodity prices and flattish growth projected in FY17. However, a spike in commodity prices may provide upside risks to this number. On the other hand, a normal monsoon may ease food inflation further.

The Economic Survey 2016 mentions that, the fiscal deficit target of 3.9% for FY16 looks achievable and that, the Government should stick to the FRBM target of 3.5% in FY17. Adhering to the FRBM targets is needed to maintain credibility and also to keep the debt to GDP ratio under control. However, there is a need to review the medium term fiscal framework, in light of the significant changes in growth and inflation outlooks across the world.

Fiscal deficit target of 3.5% FD will be a positive for the economy as well as the stock market. However, we will need to watch out for the assumptions behind this number especially in the backdrop of additional spends towards 7th Pay Commission and One Rank One Pension (OROP), which will be incorporated in the Union Budget 2016.

All-in-all, the Survey paints a realistic picture on growth & inflation, which is a departure from previous surveys. If the Finance Minister is able to target a fiscal deficit of 3.5% based on achievable and reasonable assumptions, it will be a positive for the markets.
By Kamlesh Rao, CEO, Kotak Securities

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