New govt will have hands tied in growth push

Apr 25 2014, 08:28 IST
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A senior finance ministry official said macro-economic conditions were not conducive to a strong recovery in FY15. A senior finance ministry official said macro-economic conditions were not conducive to a strong recovery in FY15.
SummaryAny increase in spending may not be endorsed by markets, which have positive view on fiscal consolidation.

The new government at the Centre may find it difficult to increase spending to spur growth and yet keep the fiscal deficit under check, at least for FY15. Any increase in spending may not be endorsed by the markets, which have a positive view on fiscal consolidation, government officials and analysts say.

“Fiscal consolidation remains critical. The credibility of the government’s fiscal policy would be strengthened through implementation of a clear strategy to reach the Fiscal Responsibility and Budget Management Act's consolidation path towards a general government deficit of 3% of GDP by FY17,” said global ratings agency Fitch in a note on April 11.

“A new government may not follow the fiscal consolidation path (for this year). It may increase spending to revive investment. That is a new administration's decision to take, but the markets and investors will not be happy,” Care Ratings chief economist Madan Sabnavis told FE.

The FY14 GDP growth, as per advance estimates, is 4.9%, the slowest in a decade.

A senior finance ministry official said macro-economic conditions were not conducive to a strong recovery in FY15. “The incoming administration will need to have patience. You can't just spend more. Markets are currently viewing fiscal deficit as the most important indicator, above inflation, CAD, or industrial output,” the official said.

While the Fiscal Responsibility and Budget Management Act has been in force since 2003, the end goals have since been changed in tune with economic swings. In his interim Budget speech earlier this year, finance minister P Chidambaram had said: “We must achieve the target of fiscal deficit of 3% of the GDP by 2016-17, and remain below that level always.”

In the same interim Budget, the non-Plan expenditure target, which includes subsidies and defence, for FY15 has been increased to R12.08 lakh crore from FY14 budgeted target of R11.1 lakh crore. “The Plan expenditure for FY15 was kept at the same level as that of FY14 (R5.5 lakh crore). There is room here (to spend more than budgeted) , but not in non-Plan spending,” said another ministry official.

The biggest problem, however, is that even if the new government does decide to spend more, it may not be able to generate the money needed for that. The FY15 tax revenue estimate is R9.86 lakh crore. Officials say unless there is a drastic change in the tax structure or an increase in the tax base, both of which

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