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  1. Budget 2017: Fiscal responsibility vs spending push: CRISIL says make effort to meet deficit target

Budget 2017: Fiscal responsibility vs spending push: CRISIL says make effort to meet deficit target

Short of a miracle, the government will find it difficult to achieve the target of limiting the fiscal deficit to 3% of GDP in the next financial year 2017-18, as laid out in the FRBM Act, CRISIL Research said.

By: | Updated: January 26, 2017 1:24 PM
India will need to prune its fiscal deficit by Rs 280-350 billion from previous year to meet 3% target. (Image: Reuters) India will need to prune its fiscal deficit by Rs 280-350 billion from previous year to meet 3% target. (Image: Reuters)

The government has a tough task of walking the tightrope between maintaining fiscal discipline by sticking to the targeted limit and kick-starting the consumption-investment cycle to provide a much-needed spur to the economy reeling under the pain of demonetisation.

Short of a miracle, the government will find it difficult to achieve the target of limiting the fiscal deficit to 3% of GDP in the next financial year 2017-18, as laid out in the FRBM Act, CRISIL Research said in a note. “India will have to prune its fiscal deficit by Rs 280-350 billion from the level in the previous fiscal”, depending upon the nominal GDP growth in the year, CRISIL said.

However, despite the limited fiscal space, the government must make efforts to meet the target in order to maintain credibility, it said.

India has already amended the Fiscal Responsibility and Budget Management Act twice – in 2012 and 2015 – to defer meeting the fiscal deficit target, which was to be originally achieved in 2009. “Postponing it further could dent credibility,” CRISIL said in the note.

Further, slippage in meeting the FRBM target could send wrong signal to the monetary authorities, which are now following an inflation-targeting framework, it added. Also, a rising debt-GDP ratio limits the fiscal room for the government, since a higher than targeted fiscal deficit would require higher spending and thus straining this ratio further.

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India’s fiscal deficit in the last fiscal year 2015-16 was at 3.9%, while the government aims to bring it down to 3.5% in the current fiscal year.

On the other hand, a fall in GDP growth, rising fuel prices, lower revenue from telecom spectrum sale and increase expenditure will make it very difficult to achieve the target, it added. But if the next year’s limit is relaxed to 3.5% then an additional spending window could be creating.

“The Budget has two immediate tasks cut out: assuage the shock received by private consumption from demonetisation, and bolster faltering investment demand,” it said, adding that in that case, the government will have to demonstrate credible steps to lift the tax/GDP ratio in the coming years.

Other factors that may tighten the government finances include excise duty on petroleum products and telecom spectrum revenue. With rising oil prices, the window to hike excise duty could narrow, as the government might have to rescind the hike that was brought into force when oil prices were sliding, it said. “Besides, CRISIL Research predicts revenue from spectrum sales in fiscal 2018 to shrink to Rs 550 billion, from Rs 700 billion in fiscal 2017,” it added.

 

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