Indian economy needs govt spending even if fiscal deficit widens: Official

The government should invoke the escape clause under the FRBM Act but stay within the prescribed 0.5 per cent wiggle room allowed in an extraordinary year under the guidelines, said the official

India's current fragile economic conditions call for government action to boost spending in the coming financial year, allowing for a widening in the fiscal deficit to bolster growth, a senior official familiar with government policymaking said.

The government should invoke the escape clause under the Fiscal Responsibility and Budget Management Act but stay within the prescribed 0.5 per cent wiggle room allowed in an extraordinary year under the guidelines, said the official, who spoke on condition on anonymity.

"Going forward for next year, there is a need for both structural and counter-cyclical measures. For counter-cyclical measures the government needs fiscal space and the present conditions are appropriate to invoke the escape clause," the official said late on Tuesday.

The government in its budget in July had proposed to bring down the fiscal deficit to 3.3 per cent in the current fiscal year ending March 2020 and then reduce it further to 3 per cent in 2020/21.

Most economists and market participants however see the current year's fiscal deficit touching 3.7-3.8 per cent  of the GDP, as growth has slowed drastically with the Indian economy expanding just 4.5 per cent in the July-September quarter, its weakest pace since 2013.

A spokesman for the Finance Ministry did not respond to requests for comments.

India needs to grow at about 8 per cent a year to create enough jobs for the millions of youth joining the labour force each year, yet many economists see the current slowdown continuing for another year or two, underlining the case for urgent reforms.

"GST revenues are low, direct tax collections have fallen.

To say the government is going to maintain a 3.3 per cent fiscal deficit in the current circumstances is unrealistic," the official said.

The government needs to spend in order to boost the economy as monetary policy actions alone have done little to revive credit demand and restart the growth engines.

The central bank has cut interest rates by 135 basis points since last February, but that has had little impact on growth.