Economic slowdown: States seek relaxation in fiscal deficit target to 4%

With tax revenue slowing in a sputtering economy, some states on Wednesday suggested Finance Minister Nirmala Sitharaman to go for fiscal expansion and relax the deficit target to 4 per cent of the GDP.

The finance minister in her July Budget reduced the fiscal deficit target for 2019-20 to 3.3 per cent from 3.4 per cent earlier.

Keeping in mind its fiscal deficit target, the government has stayed with the borrowing plan for the fiscal as announced in the
Budget despite a sharp cut in corporate tax rate that is expected to cost Rs 1.45 trillion.

During the pre-Budget consultation with Union Finance Minister, some states made a case for fiscal expansion by boosting consumption to tide over the sluggishness in the economy.

"The biggest take home from Pre-Budget discussion of FMs is suggestion by Bihar and Kerala to raise the fiscal deficit limit to 4 per cent. It was agreed to large number of states. In current year real expenditure of states will decline- a crazy macro outcome in time of recession," Kerala Finance Minister Thomas Isaac said in a tweet after pre-budget meeting here.

Some experts have already predicted that the fiscal deficit is expected to rise to 3.6-3.8 per cent of the GDP during the current fiscal due to weak revenue collections resulting from sluggish economic growth and government's sweeping corporate tax rate cut.

The country's fiscal deficit hit 102.4 per cent of 2019-20 Budget Estimate at Rs 7.2 trillion at the end of October. The fiscal deficit or the gap between expenditure and revenue was at Rs 7,20,445 crore as on October 31, 2019.

Many economists, including former RBI Governor Raghuram Rajan, have expressed fear of India getting into a slow growth high inflation or stagflation mode.

Rising food prices pushed retail inflation in November to over three-year high of 5.54 per cent, while industrial sector output shrank for the third month in a row by 3.8 per cent in October, indicating deepening slowdown in the economy.

India's economic growth slowed to a six-year low of 4.5 per cent in the July-September quarter.

With inflation rising, fears of stagflation -- a fall in aggregate demand accompanied by rising inflation -- have resurfaced.

The pre-Budget meeting was attended by Chief Ministers of Goa, Haryana and Puducherry, Deputy Chief Ministers of Arunachal Pradesh, Bihar, Delhi, Tamil Nadu and Tripura, as well as 17 Finance Ministers/Ministers representing their states and senior officers from union government and states, a finance ministry statement said.

Sitharaman elucidated union government's philosophy of "cooperative federalism" and steps taken by it to bolster growth of the economy.

The state governments welcomed the opportunity to present their views and expressed their suggestions on growth, investment, resource requirement and fiscal policy, it said.

They also suggested measures to strengthen cooperation between states and Centre to attain $5 trillion economy, the statement added.

Sitharaman welcomed the suggestions made by the state/UTs in the meeting. She assured that the memorandums submitted by them will be examined and suitably considered.