Fiscal targets range can confuse markets: Nomura

Nomura says markets could perceive it as a slightly shallower path to medium-term consolidation

Adopting a fiscal deficit target range before achieving the three per cent goal will be considered a “shallower path” in the fiscal consolidation process, Japanese brokerage Nomura said on Wednesday.

In the event of the specially-formed panel to look into the issue of range-bound fiscal targets submits a report before the next Budget, the government may change its current medium-term fiscal deficit target of three per cent of gross domestic product (GDP) in financial year 2018 to a broader range, it said.

“... it could be perceived by the market as the government is likely taking a slightly shallower path to medium-term fiscal consolidation,” Nomura said in a note.
 

FISC FIGHT

• In his Budget speech Finance Minister Arun Jaitley had mooted the idea of a range for fiscal target
   
• He stuck to the previous plan of 3.9% of GDP for the financial year
   
• A committee has been tasked to look into the matter
   
• It could suggest range of 0.30-0.40%

The commentary comes after media reports said the committee will have up to a dozen members, and will be tasked with making the case for a 0.30-0.40 per cent range for fiscal deficit numbers.

It will have independent economists, policy experts and government officials, and will look at a number of factors, including global and domestic, before setting the range, the report said.

In the Budget speech, Finance Minister Arun Jaitley had first spoken about the need to have a range on the fiscal deficit, rather than sticking to a number. He however, had stuck to the previous plan of 3.9 per cent for this financial year and 3.5 per cent for next financial year.

“There is now a school of thought that believes that instead of fixed numbers as fiscal deficit targets, it may be better to have a fiscal deficit range as the target, which would give necessary policy space to the government to deal with dynamic situations," he had said.

“While remaining committed to fiscal prudence and consolidation, a time has come to review the working of the Fiscal Responsibility and Budget Management Act, especially in the context of the uncertainty and volatility which have become the new norms of global economy,” the minister had added, announcing the committee.

The fiscal deficit number is looked at very closely by the market from the perspective of financial stability, inflation and government borrowings. The rating agencies also look at the number very closely while taking a view on the sovereign ratings.