NEW DELHI (Reuters) – The Indian government’s annual budget statement on Friday included measures aimed at improving the investment climate but lacked any direct steps to stimulate a sagging economy, adding to pressure on the Reserve Bank of India (RBI) to provide more immediate help.

Finance Minister Nirmala Sitharaman stuck to the government borrowing target announced in an interim budget in February and cut the fiscal deficit target to 3.3% of gross domestic product for the current year ending March 31, 2020, from an earlier, upwardly revised target of 3.4%. Some forecasters had expected a deficit as high as 3.7%.

Economists questioned whether the cautious budget was enough to counter severe headwinds, including weak monsoon rains, debt-burdened banks and trade tensions with the United States.

“There was widespread expectation of a stimulus to combat the current slowdown,” said Anagha Deodhar, economist at ICICI Securities. “The budget did not announce any stimulus. On the contrary, (it) raised some of the taxes.”

She added that the downward revision of the fiscal deficit target was surprising.

Sitharaman, presenting her first budget since her appointment to the finance ministry last month, did propose giving foreign investors a bigger role in India’s giant insurance and aviation sectors.

The move is intended to help reverse weakening investment flows that have led to a drop in economic growth that threatens to take the shine off Prime Minister Narendra Modi’s recent landslide general election victory.

“India’s government announced a lower fiscal deficit target for fiscal 2020, while maintaining its support for growth and incomes. Achieving these competing goals will be very challenging,” said Gene Fang, associate managing director, Sovereign Risk Group at Moody’s Investors Service.

BIGGER RATE CUTS?

Benchmark 10-year bond yields dropped as much as 19 basis points intraday to 6.56% following the release of the deficit numbers, which suggested India was planning to keep its borrowing under control.

It opens up the possibility that the Reserve Bank of India (RBI) may cut its benchmark rates by more than 25 basis points at future meetings, according to some traders and analysts.

“No fiscal slippage means growth is now in RBI’s domain, so more than 25 bps rate cuts possible,” said a senior fixed income trader at a private bank, who declined to be identified. “Also, sovereign bonds may mean lower domestic issuance and not just this fiscal year but going forward this may be a new trend.”

The Indian economy has been weakening sharply in the past year. In the fourth quarter of the fiscal year to last March 31, economic growth slumped to 5.8%, the slowest pace in 20 quarters. Growth for the full year ended in March was 6.8%, also a five-year low.

And more recent indicators, such as plummeting industrial output and a near 8-year low in automobile sales, have stoked fears of a deeper slowdown. That, in turn, has been hitting tax collections and reducing government revenue.

The central bank has cut interest rates by 75 basis points since February and investors are now expecting at least one more rate reduction in August.

“Their (government) emphasis remains on dealing with slowing growth but they have approached the problem differently,” said Radhika Rao, an economist with DBS Bank in Singapore.

“Monetary policy will do much more burden-sharing at this point. Global environment and domestic inflation gives the RBI the leeway to do much more. If yields correct, policy rates correct and borrowing costs go down that is also a boost to growth.”

The government has projected growth of 7% in 2019/20, lower than its declared ambition to get growth above 8%. But some say this is still too optimistic.

MONSOON CONCERN

A shortfall in the current monsoon rains is one new area of concern for the government, as the farm sector that employs nearly half of India’s working population is completely dependent on it. Any shortfall or untimely rains could lead to massive losses in crops, reduce farm incomes and hurt consumption.

Another concern is continued trade tensions with the United States – as well as a weakening global economy – that together are likely to keep exports in check.

But Sitharaman and the RBI did on Friday announce a series of measures to try to deal with one major obstacle to a more robust economy – the debt-burdened state-owned banks and a liquidity-deprived shadow banking sector.

That included an injection of 700 billion rupees into the banks.

The difficulty small businesses and consumers have had in getting financing for purchases has been hurting a number of industries, including automakers.

The increased spending that Sitharaman did lay out in her statement – particularly on infrastructure – is largely being funded through higher taxes on the rich and increased duties on imported products.

If economic growth doesn’t pick up, though, it will be difficult for the government to meet its fiscal deficit target as muted activity will nibble away at tax collections.