The government is weighing the aggregate costs of stimulating the economy through extra sops and will likely endorse the Prime Minister’s Economic Advisory Council’s (PMEAC) view that fiscal consolidation process must not be sacrificed. While a slight re-adjustment of the fiscal deficit target of 3.2% of GDP for FY18 could be attempted (if tax revenue falls short of the target following the GST roll-out and supplementary demands for funds are high), no costly package would be doled out, a senior finance ministry official told FE. Instead, the government would go for targeted spending and nudge departments — especially those handling infrastructure, employment-intensive and rural India-specific sectors — to ensure allocations are yielding results on the ground, he said. It would step up scrutiny of the pace of spending in schemes that serve as catalysts of rural demand including rural roads, minor irrigation and even the flagship employment guarantee programme. Between April and August, fiscal deficit touched 96% of the full-year budget target of Rs 5.47 lakh crore. Official sources said there is an evolving view in the finance ministry that a package worth around Rs 40,000-50,000 crore (roughly $6-8 billion), the maximum that it could arrange for, could be inadequate to stimulate a $2.3-trillion economy meaningfully. At the same time, such a package could not just mar the strenuously-achieved fiscal consolidation in recent years but also lead to another set of problems, including higher inflation.
In that case, an already “rigid” monetary policy committee would become even more stubborn about a hawkish stance. Global rating agencies that have been less than charitable towards India may also tend to change their outlook on the economy. Even the spending apparatus is far from solid to absorb any potential additional funds efficiently, the sources added. Plus, the government feels the worst is probably behind us. “There is a view that the economic slowdown may have bottomed out. So we have to be really careful in going ahead with stimulus,” said one of the officials. GDP growth touched a three-year low of 5.7% in Q1, FY18. The finance ministry last week started the formal consultation exercise with different departments for the 2018-19 budget. It will also have a clear picture on the supplementary demands for funds by various ministries by the middle of November.
In the latest monetary policy report, the Reserve Bank of India warned retail inflation would increase by 0.5 percentage points if fiscal deficit was expanded by 1 percentage point. A likely shortfall of Rs 40,000 crore in non-tax revenues due to a mismatch between budgetted goals and receipts of dividends from the Reserve Bank of India and spectrum sales, and potential revenue loss of Rs 13,000 crore following a cut in central excise on diesel and petrol are expected to weigh on the government’s calculations. There is considerable uncertainty over whether the GST is indeed going to be revenue-neutral this year, although tax collections so far are broadly in step with budgetted targets. Fortunately for the government, its disinvestment target of Rs 72,500 crore will be met this fiscal. But given the uncertainties about other revenue streams, declaring stimulus with substantial fiscal commitments would be unwise at this point, said the officials.
Pronab Sen, former chairman of the National Statistical Commission, said by the time the government gets through the processes required by financial rules to expand expenditure, this fiscal would have gone. “However, if the government decides to respond to any demand compression at the bottom of the pyramid, it can identify sectors where it can put money directly into the hands of the poor quickly. NREGS is one such area; rural roads and minor irrigation are other areas. I think the poor have a very high spending propensity and multiplier effects of this move(extra money in their hands) will be strong.” The government earlier aimed to trim fiscal deficit to 3% of GDP in 2018-19. The NK Singh-led FRBM committee has suggested the Centre maintain a fiscal deficit of 3% for three straight years starting FY18 itself and gradually cut it to 2.5% by 2022-23, although its suggestions are yet to be accepted formally.