Inflation Control Measures May Push Up Fiscal Deficit To 6.8%: Nomura

India’s fiscal deficit could worsen to 6.8% of gross domestic product for the year March 2023, as compared with the budget estimate of 6.4%, after the government announced a slew of measures to fight inflation. In a report on Sunday, Nomura Research said that it is raising its fiscal deficit forecast for FY24 to 6.4% from a previous estimate of 5.8%.

“We expect fiscal headwinds (excise cuts, higher food & fertiliser subsidies, lower dividends and disinvestments) to offset the tailwinds (higher tax revenues and higher nominal GDP growth),” Nomura analysts Sonal Varma and Aurodeep Nandi said in the report.

In a series of tweets on Saturday, Union Finance Minister Nirmala Sitharaman announced that the government will cut excise duty on petrol and diesel by Rs 8 per litre and Rs 6 litre respectively.

She also announced a hike on the fertiliser subsidy (0.4% of GDP) to protect farmers, as well as a subsidy on liquified petroleum gas cylinders for low income households. The government also introduced trade measures to cool prices of iron and steel, coal and plastics.

Nomura expects these measure to have an approximate 20 basis points direct impact on consumer price inflation index and an additional impact of about 10-20 basis points from second-round effects.

“However, we are leaving our CPI inflation projection for FY23 unchanged at 7.2% y-o-y, due to a spate of other upside risks,” Varma and Nandi said.

The research house expects frontloaded rate hikes of 50 basis points in June and 35 basis points in June, by the monetary policy committee, which would take the repo rate to 6.25% by April 2023.

Rising fiscal risks (bond demand-supply gap) will likely complicate the Reserve Bank of India’s liquidity withdrawal strategy. A lack of any substantial fiscal consolidation could also contribute to higher term premium over the medium term, Nomura said in its report.

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