Goldman says spending cut may not adversely impact growth

Wall Street brokerage Goldman Sachs today said the government's resolve to narrow fiscal deficit will not have any adverse impact on growth if done appropriately.
"Fiscal consolidation could remove what has been a key macro vulnerability for the country. It would not necessarily have a significant negative impact on growth as long as the composition of the adjustment is appropriate," the brokerage said in a note.
It was reacting to the government's commitment to narrow down the fiscal deficit to 4.1 per cent figure for the fiscal, and some concerns of the impact of this on growth, as the government might have to carry out massive expenditure cuts to achieve these ambitious targets.

Experts have for long been arguing about a possible re-allocation of resources for capital spending rather than current spending, to boost the growth.
In the note, Goldman Sachs said a 1 per centage point increase in capital spending can increase GDP growth by 1.2 per cent, while a similar reduction in current spending reduces GDP growth by just half of it or 0.6 per cent.
"Such a compositional shift from subsidies to capex could potentially push GDP growth up by 0.20 per cent in each of the next three years, and mitigate the negative effects of fiscal consolidation," it said.

Stating that it is possible to achieve fiscal consolidation without a significant reduction in demand, Goldman said the fiscal consolidation will not reduce the consumer price inflation.

However, if the government does meet its fiscal deficit targets, it may have some dis-inflationary impact in the FY'16 and FY17 by when fiscal gap is projected to be brought down to 3 per cent, it added.
Finance Minister Arun Jaitely had last month surprised observers by committing to the fiscal consolidation roadmap set out by the previous regime, under which the government wants to reduce the fiscal gap to 3 per cent by FY'17.

The government, however, has already exhausted 56.1 per cent of the deficit target for the full fiscal within the first quarter and a lot of questions are being asked if the 4.1 per cent target will be met.
The doubts increased after the minister had last week said meeting both the fiscal gap target as well as 20 per cent revenue growth target would be difficult to meet.