Forbes India 15th Anniversary Special

Fiscal deficit to worsen prior to 2019 elections

Oil prices, trade wars and populist spending are keeping investors on tenterhooks

Salil Panchal
Published: Aug 27, 2018 11:24:18 AM IST
Updated: Aug 28, 2018 11:40:46 AM IST

Image: plus49/Construction Photography/Avalon/Getty Images

At a time when India’s growth rate has been under pressure—it grew 6.7 percent in FY18—there could be some more bad news on the way. Deteriorating macroeconomic concerns—rising oil prices and trade wars—are starting to grow. India, which faces a current and fiscal deficit, could see greater volatility in the financial markets and the downside risk of its growth outlook.

In a note to clients dated August 8, UBS Securities economist Tanvee Gupta Jain and analyst Gautam Chhaochharia wrote they “see a risk that the combined fiscal deficit will remain elevated, at 6.5 percent of GDP in FY19”, compared to the government’s estimate of 5.9 percent. Factors such as lower-thanexpected GST collection, rising fiscal deficit of states, and higher populist spending could keep investors on tenterhooks. Government spending is expected to continue, thus delaying recovery in the investment cycle. The Reserve Bank of India has hiked interest rates twice, and another is unlikely until early 2019. But a worsening fiscal situation and inflationary pressures could prompt it to do so.