Fiscal deficit presents a growth challenge
The government is grappling with a balancing problem as growth has hit a three-year low and the fiscal deficit has touched 92 per cent of the Budget estimate in the first four months of the financial year.
A wider fiscal deficit, compared to 74 per cent of the Budget estimate in AprilJuly of FY17, was mainly due to front-loading of expenditure. Even after that, economic growth had crashed to 5.7 per cent in April-June in FY17. The government has targeted lowering the fiscal deficit to 3.2 per cent of gross domestic product (GDP) in 2017-18, from 3.5 per cent in the previous year.
Former chief statistician Pronab Sen said the government should concentrate on driving up the economy, even if it means compromising on the fiscal deficit target. “GDP growth of 5.7 per cent should scare the hell out of you. We are in a situation where the government has to take counter-cyclical measures.” States are in no position to take these measures. “The only hope we have now is the central government expenditure.”
The Centre’s finances showed consolidation in the recent years. But it was the other way round for state finances ( see box). Soumya Kanti Ghosh, State Bank of India group chief economist, said increasing growth and reining in fiscal deficit at the same time was difficult. "You have to expand economic activities, even if it means widening the deficit to 3.5 per cent."
Resolution of cases under the Insolvency and Bankruptcy Code would happen by the fourth quarter of FY18. Fresh investments would not roll in until then. The government should spend the receipts from the goods and services tax (GST) on infrastructure for economic expansion, he said.
The Centre and states had earned ~92,283 crore from GST in July, when the tax system was rolled out, against a target of ~91,000 crore. While capex increased by one-third in the first four months of FY18, against the year-ago period, the government has still spent a little less than one-third of the Budget estimate in this category. It can spend about ~20,000 crore this year without disturbing its fiscal deficit target, provided receipts do not fall short and revenue expenditure does not overshoot the target.
Capital expenditure should be increased if buoyancy in direct tax collections persist and GST-driven indirect taxes remained robust, said Aditi Nayar, principal economist with ICRA. More investments in sectors such as affordable housing, transport and urban infrastructure would have a healthy multiplier effect on growth, she said.
Devendra Pant, chief economist with India Ratings, said there was a limitation in increasing capex — government capex accounted for only 11 or 12 per cent of the total. The government should rather clear the bottlenecks in project executions, he added. There are 351 ongoing projects costing more than ~1,000 crore in the infrastructure sector but 127 of these have been delayed and 115 were facing cost overruns as of February 2017.
D K Joshi, chief economist with CRISIL, said, "I think the fiscal leeway is not there for the government to push economic growth. I don't see any levers." There is no magic wand here, he said. The government has shown fiscal conservatism. "I think, the government will stick to the fiscal deficit target." But, Joshi added, growth would rise in the coming quarters because of a low base effect, impact of pay revisions and normal monsoon.