Fiscal deficit target not cast in stone

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There is a strong probability of the Budget estimates for fiscal 2018, particularly the fiscal deficit target, getting revised midway as they are not based on a full-year data, say economists.

D K Srivastava, chief economic policy advisor at EY India, feels with the real gross domestic product (GDP) growth pegged at lower than 7% for the current fiscal and inflation trending downwards or remaining flat, the nominal GDP growth could also come in lower than the currently projected 11.75%.

This, he believes, will affect the denominator of the fiscal deficit that throws up a target of 3.2% of the GDP as well as that of tax bases estimated by the government.

“As the Budget was presented one month in advance, almost one full quarter of revenue and expenditure data were not available. Therefore the chances of revised Budget estimates, which will be based on the next year’s estimate, getting disturbed cannot be ruled out,” he said.

Further, Srivastava said, “The first concern would be in terms of the nominal GDP growth, which has been put at 11.75% and given that real growth is likely to be less than 7% in FY17 and inflation has been trending down and even if it firms, there is a possibility of a nominal growth closer to 10.5% rather than 11.75%. In which case, the denominator in the fiscal deficit limit as well as tax bases would also be affected”.

The Economic Survey 2016-17, authored by the chief economic advisor (CEA) Arvind Subramanian and presented in the Parliament last week, forecast economic fallouts of demonetization to drag down GDP growth in the current fiscal to 6%-6.75% from over 7% last fiscal.

EY’s Srivastava advocated that the government should raise its fiscal deficit goal next fiscal to 3.5%, in accordance to the margin of 50 basis points (bps) provided by the Fiscal Responsibility and Budget Management (FRBM) review committee over the 3% of its suggested deficit target.

He expects a review would be undertaken of the circumstances under which the FRBM review committee’s fiscal deficit limit could be invoked.

“The review committee has suggested constitution of Fiscal Council and based on the recommendation of the council such a decision should be taken. So, if the need arises the government may constitute a Fiscal Council and follow its recommendations,” said the EY economist.

The chief economic policy advisor of EY believes such a move would “stimulate demand”.

“I would say the government should go all the way up to 3.5% of GDP (for fiscal deficit) to stimulate demand. As desirable policy intervention government should be to increase its capital expenditure over and above what is budgeted in order to stimulate demand in the economy,” he said.

One of the major adverse outcomes of the note ban of Rs 500 and Rs 1,000 announced by the government on November 8, last year saw a slump in private consumption.

The Budget 2017-18 has accounted for the total expenditure of Rs 21.47 lakh crore and has increased capital expenditure by 25.4% over the previous fiscal.

Richa Gupta, senior economist at Deloitte India, says a mid-year review would be more realistic as by then the economic impact of demonetization would become clearer.

“Today, it (fiscal deficit) is on an optimistic note. Given everything, it should be achievable because we have been achieving them. We have achieved the 3.5% target for the current fiscal. Next fiscal, the economy is expected to do better than this fiscal. Overall, if broadly things fall in place then the target should be achievable,” she said.

However, Gupta’s optimism comes with caveats of improved exports, meeting of higher disinvestment target and wider base for direct taxes.

Srivastava, though, does not see “that there is a case for any significant optimism on account of exports”.

“Export revival appears to be very difficult because of the global trends that point to inward orientation of the developed economies such as the US and Europe. Under those circumstances pushing Indian exports might proof somewhat difficult,” he said.