Prime Minister Modi is facing the classic challenge of reviving the economy while maintaining the path of fiscal consolidation.
Fiscal Deficit: Two back-to-back bad news for the Indian economy have stoked the fears that Modi government may not be able to meet the fiscal deficit target this year despite a one-time cash transfer of Rs 1.76 lakh crore from the Reserve Bank. GDP growth number released last Saturday confirmed the slowdown which was already visible in automobile, manufacturing and FMCG sectors. But GDP growth slowing down to 5% in the first quarter of this fiscal is way below the most estimates. Another bad news was that the cumulative GST collections came down to below Rs 1 lakh crore in August, the second time in this fiscal so far.
A slowing economy coupled with low tax collections may force the government to either cut the expenditure or risk breaching the fiscal deficit target. A difficult task for finance minister Nirmala Sitharaman and her team as the path of fiscal consolidation has always been an article of faith for the NDA governments since the time first BJP Prime Minister Atal Bihari Vajpayee.
“They may choose to stick with the target. In fact one of the reasons why this thing (transfer from the RBI) has been done is to ensure that there is no significant deviation from the fiscal deficit target,” said economist Praveen Jha.
“In a way, this is an admission by the government that the situation is very distressing on the resource front hence it needed a small bailout of this kind,” he told Financial Express Online.
In his first term, Prime Minister Modi always laid emphasis on sticking to the fiscal deficit targets set in the Union budget. However, in the first year of his second term, the government needs to take urgent steps to arrest the downfall in the economy. Finance minister Nirmala Sitharaman has already announced a mini fiscal stimulus to shore up the economy, however, her task to boost the economy without breaching the fiscal deficit target has become even more daunting after the release of GDP data for the first quarter of this fiscal. It may force the government to expedite its disinvestment plan.
“The next big thing could be the selling of public sector units,” economist Praveen Jha told Financial Express Online while discussing other avenues available to the government.
Finance minister Nirmala Sitharaman has already set a target of raising Rs 1.05 lakh crore from disinvestment in this fiscal, an increase of Rs 25,000 crore over the disinvestment proceeds received by the government last year.
“It is through these mechanisms that they could try to meet the fiscal deficit target, this appears to be the dominant view in the government,” he said.