Batting for fiscal consolidation

The last two Economic Surveys stood out in terms of scholarship, with well-researched insights and prognosis of the economy, nifty presentation, and absorbing narration.

The latest edition is no different, only the macroeconomic context has changed — and how. Unlike the last two, where drought clouded the outlook, this one has been written in the backdrop of an unprecedented monetary experiment — demonetisation — and the imminent tectonic shift in geopolitics and global trade. After decades of opening up and integration, the world economy seems to be taking an insular turn. The International Monetary Fund has forecast a gradual, 30-basis point rise in global growth to 3.4 per cent in 2017, but such optimism has often been belied before. This time around, geopolitical risks can intensify and potentially morph into economic risks.

Advancing the Survey by a month has further complicated the task of Chief Economic Advisor Arvind Subramanian, as he has to work with fewer data points and tentative gross domestic product (GDP) estimates for the current financial year.

To be sure, the Survey is also cognizant of the potential positive effects of all this on the economy if complemented, apart from reasonable remonetisation, by other measures such as raising tax buoyancy by simplifying the tax structure, and expanding the scope of the goods and services tax (GST) to include land and real estate.

Given the context of heightened economic uncertainties and many moving parts, the Survey presages GDP growth for the next financial year in a wide range — 6.75-7.5 per cent — than in a point estimate. It does not see a lasting impact of demonetisation on growth beyond the current financial year and mild spill over to FY18. What’s noteworthy is that GDP growth is foreseen settling lower than 7.7 per cent, which is the average of the last 13 years (average computed using the old GDP series till 2011-12 and new series, thereafter). Inflation is flagged as a risk in 2017, which would mean rate cuts by the Reserve Bank of India could be capped and the monetary policy is unlikely to be very dovish.

Importantly, the Survey bats for fiscal consolidation and soundness of fiscal policy principles laid out in the Fiscal Responsibility and Budget Management (FRBM) Act. It also does not see much local relevance to the aggressive fiscal policies being pursued by developed countries.

“India’s experience has also highlighted the risk of relying on rapid growth rather than steady primary balance adjustment to reduce debt, a strategy that has failed to place the debt-GDP ratio firmly on a downward path,” the Survey says.

If the Budget dances to the tune of the Survey, we could see fiscal deficit at the pre-committed three per cent of GDP by March 2018. Such a stance would augur well for monetary and fiscal policy coordination under the inflation-targeting regime. This target is likely to be breached only if the FRBM Committee under NK Singh recommends so.

We will know that soon.

If the Budget dances to the tune of the Survey, we could see fiscal deficit at 3% of GDP by March 2018