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ANZ analysts suggest that India’s FY20 (fiscal year ending March 2020) Union Budget due later today will test the ability and intent of the government to stick to the interim fiscal deficit target of 3.4% of GDP.

Key Quotes

“While this issue will be of immediate relevance for financial markets, it is likely that attention will gradually shift to the consolidated fiscal deficit which includes the direct deficit of the central government, its off-budget financing and that of state governments.”

“The consolidated fiscal position continues to remain weak owing to a greater reliance on off-budget spending as well as the failure of state governments to meaningfully lower their deficits.”

“In our view, below-target tax collections underlie the motivation for off-budget financing. This problem is unlikely to fade until growth momentum considerably improves and structural improvements are made towards augmenting tax collections. A special dividend from the Reserve Bank of India (RBI) will help to lower the fiscal deficit but only temporarily.”