Arun Jaitley hints future fiscal deficit targets may be recalibrated

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Singapore: Finance minister Arun Jaitley hinted on Thursday that while there was no immediate threat of missing the fiscal deficit target for the fiscal year ending 31 March, future targets may be recalibrated.

“No pause (on fiscal consolidation) but challenges arising from structural reforms…could change the glide path,” Jaitley said at the annual Asia Pacific meeting organised by Morgan Stanley in Singapore.

The government has set a fiscal deficit target of 3.2% of GDP for 2017-18 and 3% for the next fiscal. A high-level committee on fiscal discipline headed by former revenue secretary N.K. Singh has recommended a glide path to bring down the fiscal deficit and debt-to-GDP ratio to 2.5% and 38.7%, respectively, by the fiscal year 2022-23 from 3.5% and 49.4% in 2016-17.

Jaitley seems to be indicating that the goods and services tax (GST) has created short-term uncertainty and the government may not follow the aggressive fiscal consolidation path set in this year’s budget, said D.K. Joshi, chief economist at Crisil Ltd. “Government may move slowly towards the 3% fiscal deficit target and defer it by a year or two,” he added.

According to Jaitley, the public sector is poised for a rejig and the government is considering policy to specifically address the credit needs of the small and medium enterprises—which are also key employers in the economy.

“Recapitalisation (of public sector banks) will be performance-linked. Announcement will be made soon. One or two instances of consolidation in SOE (state-owned enterprise) banks over the next 12 months. SOE banks to be encouraged to use capital to lend to MSMEs (micro, small and medium enterprises). Concerted policy to direct loans to MSME in the near future,” he was quoted as saying in a press release put out by Morgan Stanley.

Jaitley also identified the policy priorities of the Bhartiya Janata Party (BJP)-led National Democratic Alliance (NDA) government. “Two areas of focus. One, to build rural India (housing, roads, electrification, sanitation, education and health) and two, to build national infrastructure”.

The NDA has already committed itself to a December 2018 deadline for electrifying every village in the country. The finance minister’s remarks suggest that this focus on developing human capital may be reflected in the upcoming budget, due to be presented on 1 February—also the last full budget before the next general election due in 2019.

Similarly, the FM identified key focus areas for the NDA in its bid to further improve the country’s rankings in the ease of doing business index compiled by the World Bank. This year, India rose 30 notches to the 100th place in the rankings.

According to Jaitley, the government is proposing to introduce legislation in the upcoming session of Parliament to amend the contract law to guarantee enforcement of contracts; after the roll out of the goods and services tax this will be another signal by the NDA of its commitment to create an ecosystem driven by the rule of the law, one that is friendly to entrepreneurs.

Jaitley categorically said that there was no central support to any farm loan waiver by state governments, reiterating the NDA’s commitment to adhere to its fiscal targets.

Addressing investors, the FM held out hope that private sector investment would revive. “Investments have been slow because of surplus capacity but a combination of a better global economy, bank recap and FDI (foreign direct investment) and public investments should help improve private capex (capital expenditure),” he said.