Nomura expects fiscal deficit to narrow to 7.2% of GDP, as higher nominal growth and tax revenues will partly be offset by the need to allocate more on health, vaccines and capital expenditure.
In light of the stretched fiscal finances, Nomura also sees a risk of higher taxes especially on petroleum products, the GST rate on sin goods and tax increases on higher income brackets.
“Structural balance sheet challenges remain, particularly elevated non-performing assets in the financial sector, constrained fiscal space and a corporate sector focused more on deleveraging than capex. Owing to the lack of job creation, the cycle’s durability could be on shaky ground,” Nomura said in a note.
For 2021, however, we believe risks are skewed towards an upside surprise on both growth and inflation, it said.
Meanwhile, the brokerage house estimates that India could well be on a path to cyclical growth recovery. It estimates an above-consensus GDP growth rebound to 9.9% year-on-year.
The growth pick-up so far reflects normalisation of activity, and in the absence of vaccines, it is likely to face occasional hiccups.
“However, this is unlikely to derail the cycle, which appears poised to accelerate owing to the lagged effects of easy financial conditions, a synchronised global recovery and likely “vaccine pivot” in the second half of 2021, which should lead to a catch-up in the lagging sectors,” Nomura said.
Meanwhile, a gradual easing of supply chain disruptions should correct the wide retail-wholesale food inflation gap, but this will be partially offset by rising commodity input costs, a gradual demand recovery and firms looking to mend their balance sheet.
Nomura expects inflation to moderate to an average of 4.8% y-o-y in 2021, versus 6.8% in 2020, although still above the RBI’s 4% target.
Because of the vaccine uncertainty, Nomura expects the RBI to continue to maintain an accommodative stance in the first half of 2021.
However, growing confidence surrounding the recovery, amid 4% plus inflation and risk of higher commodity prices suggests an exit strategy might be given consideration sometime in second half of 2021, Nomura said.