Pause in fiscal consolidation not ruled out in Budget: Survey

Attempting to calm stock, bond and money markets as also investors ahead of February 1 Union Budget, the Economic Survey on Monday hinted at a break in the government's fiscal consolidation plan in a pre-election year.

"A key policy question will be the fiscal path for the coming year. Given the imperative of establishing credibility after this year, given the improved outlook for growth....fiscal policy should ideally have targeted a reasonable fiscal consolidation.

"However, setting overly ambitious targets for consolidation -- especially in a pre-election year -- based on optimistic forecasts that carry a high risk of not being realised will not garner credibility either," the Survey said, suggesting a modest consolidation that credibly signals a return to the path of gradual but steady fiscal deficit reductions.

The fiscal deficit for the first eight months of 2017-18 reached 112% of the total for the year, far above the 89% norm in the last five years. Centre's s fiscal deficit until November was Rs 6.1 lakh crore compared to the budgeted Rs 5.5 lakh crore.

In contrast, state governments seemed to be cutting closely to their targeted fiscal consolidation, partly because the centre guaranteed them a large increase in their indirect tax off take as part of the GST agreement.

Investors, rating agencies and markets across the world watch out for the fiscal deficit number very closely as it reflects the government's resolve to keep its finances under check. "Reflecting largely fiscal developments at the centre, a pause in general government fiscal consolidation relative to 2016-17 cannot be ruled out," the Survey said.

In addition, the measured deficit for 2017-18 will include Rs 80,000 crore (0.5% of GDP) in capital provided to public sector banks, it said. "But this will not affect aggregate demand, as reflected in international accounting practice which deems such operations as financing ("below-the-line") rather than expenditure." The government last week announced its bank recapitalisation programme front-loading entire Rs 2.11 lakh crore of expenditure in the current fiscal ending March 3, but said the move will be cash-neutral. That implied that the government will not spend any fresh money per say.