Union Budget 2018: The budgeted fiscal deficit is in line with expectations but there are some risks of slippage in financial year 2018-19, unless economic activities formalise at a rapid pace, says a Goldman Sachs report. According to the global financial services major, while the budgeted deficit is in line with expectations, the revenue targets are on the optimistic side, particularly on recently-introduced GST tax revenue growth. “We estimate a 20 bps upside risk to the fiscal deficit in 2018-19, unless economic activities formalise at a rapid pace over the coming year to generate the necessary buoyancy in revenues,” Goldman Sachs said in a research note. The government outlined a fiscal deficit target of 3.3 per cent of GDP in 2018-19 as against a revised estimate of 3.5 per cent in 2017-18, indicating some fiscal consolidation, albeit at a slower pace than that recommended under the Fiscal Responsibility and Budget Management (FRBM) framework. According to Goldman Sachs, risks tilted towards a higher fiscal deficit for 2018-19.
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Lower indirect tax revenue collections may outweigh any upside risks from higher nominal GDP growth, non-tax revenue and direct tax collection, it said adding the government is unlikely to cut spending considerably next year, even if revenues undershoot the budgeted amount, in order to support growth ahead of the elections. “This could take the fiscal deficit to 3.5 per cent of GDP versus the 3.3 per cent budgeted,” it noted. Moreover, higher oil prices could exert additional pressure on the fiscal deficit.
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Based on the overall oil subsidy estimate in the Union Budget 2018, the government appears to have assumed oil prices to average between USD 60-65/bbl, about USD 10-15/bbl lower than the Goldman Sachs commodity team’s oil price forecast. “We estimate that every USD 10/bbl increase in oil prices could increase the fiscal deficit by 0.3 pp of GDP if the government absorbs the entire shock,” it said.
Goldman Sachs’ equity analysts see Budget 2018 as positive for infrastructure, industrials, autos, financials, and healthcare, but negative for oil and gas sector.