New Delhi: The government's likely approach of giving priority to growth numbers at the expense of fiscal consolidation could prove "counter-productive", says HSBC.
Underweight on India, the global brokerage firm today said in a report that despite the recent sell-off in Indian equities, there remains a mismatch between expectations and reality which has not been "fully priced in".
The best outcome would be for policymakers to stick to the fiscal consolidation target, while providing funds for selected growth initiatives, it said.
However, it added that due to the contentious nature of fiscal reforms that are needed, the government might prefer to tilt the balance towards attempts to boost growth at the expense of fiscal consolidation.
"We think opting for growth over fiscal discipline could prove counter-productive because it may hurt market confidence as a bigger fiscal deficit will lead to higher government borrowings and higher bond yields; this, in turn, might reduce the scope for rate cuts," the report noted.
According to HSBC, Finance Minister Arun Jaitley is likely to stretch the fiscal deficit target to 3.8 per cent of GDP for the next fiscal from the earlier commitment of 3.5 per cent.
"We believe the government, facing mounting spending pressure such as a higher wage bill, may choose to sign up for a wider deficit of 3.8 per cent of GDP," HSBC India Chief Economist Pranjul Bhandari said in a note.
"A combination of fiscal consolidation and spending on growth could make us more constructive on the Indian equity market, although valuations and earnings revisions remain key as well," the report said.
In the Budget for 2015-16, Jaitley had stretched the fiscal deficit target to 3.9 per cent from the earlier 3.6 per cent to address growth concerns. The Budget for the next fiscal is to be presented on February 29.
International rating agencies have threatened to downgrade the country's sovereign rating if the government neglects fiscal maths.