India weighs breach of deficit target to stimulate demand
MODI ADVISERS RAISE CONCERN ABOUT SLOWDOWN OFFSETTING BUDGET CALCULATIONS
India claims to be the world’s fastest-growing major economy, yet the government might break its budget deficit targets to stimulate demand, potentially undermining the central bank’s fight against inflation.
Statistically, Asia’s thirdlargest economy is outpacing China with above 7 per cent annual growth. But Prime Minister Narendra Modi’s economic advisers are complaining of a sharp slowdown that threatens their budget calculations.
In February, Finance Minister Arun Jaitley will present the budget for the fiscal year starting April 1. A senior official said the minister has been advised to increase its fiscal deficit target to 3.7 or 3.9 per cent of gross domestic product (GDP) from 3.5 per cent.
There is also a proposal to delay, by one year, a goal of lowering the fiscal deficit to 3 per cent in 2017/2018, the official said.
“The economy is still suffering from slack demand,” said the finance ministry official. “It needs a conducive fiscal and monetary policy.”
But Shaktikanta Das, the ministry’s economic affairs secretary, said the government has yet to decide on relaxing the deficit targets.
Running a higher deficit could antagonise the Reserve Bank of India (RBI), which is counting on Jaitley’s pledge of tight fiscal policy to keep inflation to 5 per cent by March 2017.
“A miss on the fiscal targets will narrow scope for additional rate cuts,” said economists at DBS in Singapore.
Differences on what the government should do - spend to stimulate and risk high inflation, or cut the fiscal deficit to contain it - stem from a sharp divergence between nominal and real, or inflation-adjusted, growth, as well as in the direction of wholesale and retail prices.
GDP data “is underestimating nominal growth and overestimating real growth,” said N.R. Bhanumurthy, a professor at the government-funded National Institute of Public Finance and Policy.
He and other economists blame an over-representation of the wholesale price index in the GDP “deflator” for the anomaly.
The government uses the deflator to strip out price changes to make quarters comparable. Wholesale prices have a bigger weight in the deflator than retail ones.
Recently, have fallen, commodity wholesale prices due to crashing prices, showing a deflationary trend - hence some officials are pitching for stimulus. But since September, retail inflation has picked up, hitting 5.41 per cent in November. This has rekindled inflation worries, and argues for reducing the fiscal deficit.
The RBI is already bracing for the inflationary fallout of a salary hike for millions of government employees next fiscal year.
“The mess is being created in Delhi, but the RBI will have to absorb the shock,” said Bhanumurthy.