The Indian government will need to continue to prune its spending in the next year as well to meet its budgeted fiscal deficit target. Therefore, the trend of forced fiscal austerity will likely continue next year, says Nomura in a research note
The Indian government has managed to improve upon the stated fiscal consolidation target in FY14, partly by pruning expenditure and partly by postponing payments, says Nomura in a research note.
“The government will need to continue to prune its spending in the next year as well to meet the budgeted fiscal deficit target. Therefore, the trend of forced fiscal austerity will likely continue next year. The true and final picture on the fiscal front will be known only in July following the elections,” Nomura said.
The government presented the interim budget (or vote on account) on Monday. A vote on account is a special constitutional provision by which the government has Parliament vote to secure funds for essential expenditures for part of the next financial year. The final budget will be presented sometime in June/ July when the next government is in place (after the elections).
The government set the revised estimate for the FY14 (year-end March 2014) fiscal deficit at 4.6% of GDP, which is better than the budget estimate of 4.8%. Despite the substantial slippage on the revenue front, the government cut its spending by Rs750 billion (relative to the budget target) in order to lower the fiscal deficit. In FY15, the government has set a fiscal deficit target of 4.1% of GDP, marginally better than expected (4.2%).
The government expects nominal GDP growth of 13.4% y-o-y in FY15 after 11.9% growth in FY14.
Beyond presenting the specifics of the budget, the Finance Minister also presented the intentions of the current government, in the event that it returns to power following the elections. The Finance Minister stated that the current government intends to remain committed to the National Food Security Act, fiscal consolidation (targeting a deficit of 3% of GDP in FY17), the rebuilding of infrastructure, pruning subsidies to only those that are necessary, skill development and the passage of the goods and services tax and direct tax code.
You can expect to get yield of nearly 10% for AAA rated bonds maturing in the next three years. Bond yields have remained unchanged over the past couple of weeks, despite the hike in the repo rate by 25bps, to 8%, by Reserve Bank of India (RBI) on 27th January.
IDBI Mutual Fund launched IDBI Debt Opportunities Fund which is an open-ended income scheme. The NFO period was 11th February to 24th February. The scheme plans to invest in good-quality corporate bonds, after setting exposure limits. There will be diversification across companies, industries and maturities. Investors should have a medium to long horizon—of 18 months and above. There is an exit-load of 2% for redemption before 18 months. The scheme will invest zero to 90% in debt securities of low to medium risk profile, while 10% to 100% will be in money-market instruments of low risk profile. Investments would be made in commercial paper (CP), certificate of deposit (CD), non-convertible debentures (NCD) and bonds of corporates, PSUs, banks and financial institutions.