JOIN USIndia weighs fiscal stimulus in Budget despite growth
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 third largest economy is outpacing China with above seven 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 a goal of lowering the fiscal deficit to three per cent in 2017-18 by one year, 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 RBI, which is counting on Jaitley’s pledge of a tight fiscal policy to keep inflation to five 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.
Falling wholesale prices
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, wholesale prices have fallen, due to crashing commodity prices, showing a deflationary trend — hence some officials are pitching for stimulus.
Real annual GDP accelerated in July-September to 7.4 per cent from 7 per cent. But growth of nominal GDP, which Jaitley relies on to drive tax revenue, slowed sharply to 6 per cent from 8.8 per cent in April-June, suggesting tepid demand. It was the first time in recent quarters nominal growth lagged the real figure.
The RBI is already bracing for the inflationary fallout of a salary hike for government employees next fiscal year.
Tumultuous journey
India’s annual GDP accelerated in July-September to 7.4% from 7 % in the same period last year
Even though India outpacing China, PM Modi‘s economic advisers are complaining of a sharp slowdown
The govt is advised to increase its fiscal deficit target to 3.7% or 3.9% of GDP from 3.5%