Growth pangs: Govt, RBI have limited room for pump-priming

The continuing slowdown is likely to increase pressure for additional stimulus through a higher fiscal deficit, accommodative policy stance and a competitive rupee, which unfortunately has limited scope, says a report.
The first quarter GDP growth has slipped to a three year low of 5.7 per cent this fiscal year. According to Singaporean financial services major DBS, key economic growth drivers of consumption, investments and government spending, are expected to be moderate for the rest of this year.
"As growth slows, pressure for policy support is likely to mount. This will include calls to delay fiscal consolidation, along with a push for the Reserve Bank to resume rate cuts amidst clamour for a competitive currency," the report said, adding "unfortunately, the room to provide additional stimulus on all these fronts is limited".

It further noted that "unfortunately, revenues have been slow to catch-up...Hence, government may struggle to meet its full-year fiscal deficit target of 3.2 per cent of GDP for 2017-18. Therefore any shortfall in revenues may require a cut in spending in the March 2018 quarter, and lower the headroom for a growth supportive stance".
The report comes on a day when Finance Minister Arun Jaitley said government is considering additional measures to bolster the economy that has hit a three-year low of 5.7 per cent in the first quarter of the current fiscal. However, he has not given details on the likely measures.

"We see limited scope for fiscal pump-priming measures and an aggressive rate cutting cycle to support growth. Adopting such quick fixes are a threat to near-term macro stability and carry long-term implications," DBS said.

A strong fiscal and monetary stimulus following the 2008 global credit crisis had initially shored up domestic growth through higher consumption and public investment, but subsequently led to double-digit inflation and wide domestic and external imbalances, the report noted.
Looking for additional stimulus current on the fiscal front, DBS said "the odds are against an increase in the deficit target to accommodate higher spending without a commensurate pick-up in revenues".

Among others, it observed that this year's fiscal math is already stressed as public spending was front-loaded to offset slower private sector participation and cushion the impact of GST roll-out.
It also notes that consolidated deficit is already in excess of 6.5-7 per cent of GDP, and with states' books in a worrisome state, a simultaneous deterioration in Centre's finances "could prove to be a double whammy for macro stability, financial markets and rating prospects".
On possibility of rate cuts, DBS said RBI had last cut rates by 25 bps in August when inflation slipped below the targeted 2-6 per cent range. But headline and core inflation numbers rose to 3.4 per cent and 4.6 per cent respectively and is expected to strengthen to 3.8-4.5 per cent in second half.

"As inflation nears and/or breaches the 4 per cent target, the policy committee should refrain from another rate cut to support below-trend growth," the report noted.
Growth was derailed by the November last note-ban which had hit rural consumption and affected other cash- sensitive sectors such as construction, trade, logistics and SMEs. Subdued demand also aggravated the existing weak spell in manufacturing and capital formation, pushing down growth to 6.5 per cent in H2 from 7.7 per cent in H1 of FY17, it said.