As a heated debate ensues on whether the government should consider a fiscal stimulus in the wake of a slowdown in economic growth for five straight quarters, it would be helpful to see how we stack up against emerging market peers.
The accompanying chart shows that India is the second-worst after Brazil in terms of fiscal deficit as a percentage of gross domestic product (GDP). Brazil’s economic slowdown is far more severe than India’s, which explains its large fiscal deficit. Those of China and Russia are 3.7% of GDP. Unlike Brazil, Middle Eastern countries and Russia are economies relying heavily on commodities whose prices have dropped sharply. India, on the other hand, has been a beneficiary of a fall in prices.
The World Bank notes that although commodity exporting economies saw a logical rise in fiscal deficits in the aftermath of the global price fall, beneficiaries like India didn’t see an improvement in their deficits.
The International Monetary Fund (IMF) has warned about the pitfalls of running high fiscal deficits for long years in emerging market economies, irrespective of the intensity of economic slowdown. Multilateral organizations such as IMF and the World Bank have warned about rising public debt and fiscal deficit in not just the advanced economies but also emerging economies in the aftermath of the 2008 global financial crisis.
The fiscal metrics of most emerging economies have worsened over the past two years as a response to the growth slowdown. For India, the combined central and state fiscal deficit for fiscal year 2017 was 6.5% of GDP and analysts estimate that the response to domestic agricultural distress through farm loan waivers could add 25-50 basis points to this number in the current fiscal year. A basis point is one-hundredth of a percentage point.
In case the central government concedes to a fiscal stimulus, that could also add further upward pressure. A three-year-low in GDP growth, stemming from comatose investment demand, may make a fiscal stimulus look necessary but analysts say they believe that loosening an already liberal fiscal policy would be a recipe for disaster.