₹1L cr kitty cuts need for LIC IPO in Budget

MUMBAI: A large cash balance of over Rs 1 lakh crore would help the government tide over the financial year even if the budgeted Life Insurance Corporation's initial public offering (IPO) fails to make it before the March 31 deadline. This could still have implications for the fiscal deficit. But the government also has the headroom to contain the deficit's impact by holding back on some of the spendings.

According to Axis Bank's chief economist

Saugata Bhattacharya

, the large cash balance with the government will be the key calibrating instrument to alleviate market borrowing pressure. He added that tax flows in the fourth quarter are also expected to be robust, which will improve the government's cash position. As a result, the Centre will not have to look out for new means to fund the deficit even if the

LIC

IPO were not factored in. As of now the government continues to target an IPO this fiscal.

It is widely expected that the LIC IPO would raise over Rs 75,000 crore and contribute significantly to government revenues. However, the Omicron wave and the crash in prices of stocks listed recently have thrown up challenges.

Bhattacharya said, even though the LIC IPO appears to be a bit of a touch-and-go, the government can yet stick to the fiscal deficit target by shifting some spending, or curtailing expenditure. Without the IPO, he expects the slippage to be small at around 6.5% as against the 6.4% that Axis Bank has estimated.

According to HSBC's chief economist

Pranjul Bhandari

, the cash balance could be used to ease pressure on bond markets, given expectations of a large government borrowing in FY23. The other measures she highlights are the push to bond inclusion in global indices and developing a retail debt market.

The pressure on interest rates is also expected to emerge from policy normalisation with tightening taking place immediately after the Budget in RBI's February policy or during the next financial year in April 2022. Bhandari pointed out that, with the global rise in oil and fertiliser prices, upside risks to food inflation are also there and the time is ripe for a 20bps (100 basis points = 1 percentage point) reverse repo rate hike in the February 9 meeting.

SBI's chief economist

Soumya Kanti Ghosh

has forecast a fiscal deficit of 6-6.5% for the next financial year (FY23). "If disinvestment of LIC passes through in FY22, the government might be ending the fiscal with a large cash balance of Rs 3 lakh crore. This can come handy in supporting a large part of government fiscal deficit without taking recourse to market borrowings,"

Ghosh

said in a recent note.

Sonal Varma of Nomura Securities expects the government to stay within its 6.8% GDP deficit target set out in the FY22 Budget, with higher tax revenue collections.

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