India faces fiscal deficit target miss after extra borrowing

India will borrow an additional 500 billion rupees ($7.79 billion) this fiscal year, a higher-than-expected figure that could lead to it breaching its fiscal deficit target for the first time in four years and hit the bond and equities markets.

The announcement by the finance ministry on Wednesday comes weeks after Moody`s Investors Service upgraded India`s sovereign credit rating for the first time in nearly 14 years, in a boost for Prime Minister Narendra Modi`s government. It had vowed to maintain fiscal discipline without compromising growth.

But analysts said the additional borrowing was a "negative" that could raise the fiscal deficit to 3.5 percent of gross domestic product, against Finance Minister Arun Jaitley`s stated target of 3.2 percent.

India is having to raise the extra funds as the federal government has already spent over $200 billion in eight months to October, about 60 percent of the budgeted spending, while revenue collections were just 48 percent of the target.

The government`s tax collection plunged after the launch of the national Goods and Services Tax (GST) in July that complicated tax filings for business and hit the economy.

Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody`s, said the additional borrowing could lead to "modest fiscal slippage" as the government was likely to miss its revenue receipts target.

"Given the clouded outlook for revenues, sticking to the fiscal consolidation roadmap would entail compression of expenditure, which would dampen the expected economic growth recovery in March quarter," Nayar said.

Rajiv Kumar, vice chairman of the government`s policy panel NITI Aayog, said the borrowing was required to "nurture the green shoots of economic recovery".

"The health of the economy is more important than meeting any fiscal deficit target," he told ET Now news channel.

A few analysts, however, said some additional borrowing was expected and was priced into bond yields, meaning there are unlikely to be big swings in them on Thursday. The announcement on borrowing came after markets closed on Wednesday.

Reuters reported earlier that the government was considering cutting capital expenditure by at least 300 billion rupees in the March quarter.

New Delhi has also sought higher dividends from state companies.

N.R. Bhanumurthy, an economist at New Delhi think-tank National Institute of Public Finance and Policy, said the government was entering "uncharted territory" after the fall in revenue collections.

"In any case, a 3.2 percent target was not a realistic number after the launch of GST."