Government is keen to meet FY18 deficit target

Government is keen to meet FY18 deficit target

The government is keen on sticking to the fiscal deficit target for the year and will look for ways to make up for any revenue shortfall that could hinder this plan. The thinking at the highest level of the government is that the fiscal deficit target of 3.2% of GDP for FY18 should be met, though there can be some relaxation in the consolidation roadmap beyond that.

"There seems to be some discomfort about letting go fiscal goals... The thinking as of now is that the target should be met," said a senior government official aware of the matter.There have been preliminary discussions on the issue but a final call will only be taken after the revenue position becomes clearer post December. The government has met budget targets in the last three years, which has helped establish budget credibility, something that it does not want to compromise.

Following a slump in growth in the third quarter to a three-year low, there had been speculation about a fiscal stimulus package aimed at boosting the economy but that's abated amid signs of revival. Recent assessments by Moody's, which upgraded its India rating, and Standard and Poor's, which kept it unchanged, have cited the fiscal deficit as a key risk.

The NK Singh committee set up to review the fiscal roadmap has given the government some wriggle room to breach the target in years of "far-reaching structural reforms in the economy with unanticipated fiscal implications" but the government is not inclined to take advantage of this. Besides, fiscal slippage at this time won't sit well with inflation set to accelerate and the current account deficit, though manageable, beginning to deteriorate.

A rising fiscal deficit at this stage could exacerbate both. Finance minister Arun Jaitley said last week that the government had an impeccable record on fiscal deficit."We intend to move forward on this," he had said. "No pause but challenges arising from structural reforms which could change the glide path (of fiscal consolidation)," Jaitley had said earlier this month.

There had been concerns over the fiscal deficit running ahead of the trend halfway through the year. While that has eased somewhat, the government will find it difficult to stay within target with uncertainty over some revenue items. The dividend from the Reserve Bank of India at Rs 31,659 crore is well below what was budgeted. There is uncertainty over spectrum realisation with the telecom sector struggling and tax revenues uncertain with the rollout of the goods and services tax (GST) on July 1.

The government expects Rs 44,300 crore from spectrum auctions and Rs 74,901 crore in dividends from banks and RBI. There may be some additional spending as well, for instance, on the Mahatma Gandhi National Rural  Employment Guarantee Scheme (MGNREGS), which may need more funds. At the end of September, the fiscal deficit was 91.3% of that budgeted for FY18, well ahead of 83.9% at the same time last year. The government expects the current year to be a challenging one.

"This is a year of transition, lots of reforms are being done, (structural) reforms, fundamental in nature, which have made their impact on growth, on revenues and others. But the commitment of the government to stay on course on fiscal consolidation, in the medium term, is completely there," economic affairs secretary Subhash C Garg had said last week.

"Transition is challenging, definitely. But how much, whether it is substantial, whether it's anything meaningful, for that, still the assessment is to be made," Garg said. Independent experts believe slippage is unavoidable. "Notwithstanding the encouraging budget numbers in September, there is a risk of a modest miss to the FY18 deficit target, which is currently at 3.2% of GDP," DBS economist Radhika Rao said in a recent note.

Consolidation Road Map

The NK Singh committee had suggested a new fiscal consolidation focus on government debt rather than the fiscal deficit. It suggested a total government debt of 60% of GDP by FY23 and provided fiscal goalposts to attain this target. It suggested a fiscal deficit of 3.0% for FY18 through FY20. It has allowed a deviation of 0.5 percentage point of GDP in a year under three conditions, one of them being the structural reforms cited above

GST disruption would qualify as one such reform. If the government uses this relaxation next fiscal, it will mean a fiscal deficit target of 3.5% of GDP, instead of 3.0%. The government is expected to take a view on the report soon.

The Economioc Times, New Delhi, 27th November 2017