Budget 2018: Avoid ambitious fiscal deficit targets, says Economic Survey

Says market concerns over additional borrowings incorrect

Chief Economic Advisor Arvind Subramanian and his team did not rule out a Union fiscal deficit wider than the targeted 3.2 per cent of gross domestic product (GDP) for the current financial year (FY18).

  

Ahead of the Budget for 2018-19, the Economic Survey for 2017-18 said that ambitious targets of fiscal consolidation for the coming pre-election year be avoided. Does that mean the target of 3.2 per cent for the next year, given in the medium-term fiscal policy statement, is ambitious? The Survey did not go into that.

It also said market concerns over linking Rs 500 billion of additional market borrowings to a proportionate widening of the fiscal deficit for FY18 were unfounded because this mop-up could go hand-in-hand with lower withdrawals from the National Small Savings Fund (NSSF). 

It should be noted here that the government since then had reduced the amount of additional borrowings to Rs 200 billion. 

“Reflecting largely fiscal developments at the Centre, a pause in general government fiscal consolidation relative to 2016-17 cannot be ruled out,” said the Survey. 

This means that while there is a probability of the Centre breaching the fiscal deficit target given in the Budget Estimates, states seem to be proceeding along the path of the targeted fiscal consolidation. This could be partly attributed to the Centre’s guarantee to compensate states for revenue losses under the goods and services tax (GST), says the Survey. 

The Centre’s fiscal deficit has already overshot the budgeted figure of Rs 5.5 trillion by 12 per cent till November this year. This was far above the average of the last five years at 89 per cent of the Budget Estimates, said the Survey. 

However, it also pointed out that disinvestment receipts would surpass the budgeted target of more than Rs 700 billion for the current financial year to partially offset the trend of lower receipts under other heads. 

The Survey projected GDP at current prices to grow by 10.5 per cent, against 9.5 per cent by the Central Statistics Office. However, the Budget for 2017-18 had assumed the growth rate to be 11.75 per cent, so even the Survey’s prediction may require some tightening so far as fiscal consolidation for this year is concerned. 

Anis Chakravarty, lead economist and partner, Deloitte India, said: “The debate on the extent of the fiscal deficit continues and whether there should be further consolidation in the near term.”

The Survey said while concerns over the fiscal deficit overshooting 3.2 per cent were real, worries over the strict linkage between additional market borrowings and the deficit were not. 

“… market borrowings do not necessarily reflect the underlying fiscal deficit. That’s because in India market borrowings are determined not just by the fiscal deficits but also by a distinctively Indian arrangement, the NSSF,” the Survey pointed out.

The Survey referred to additional borrowings by both the Centre and states. 

Subramanian said market borrowings by the Centre and states did not add to a proportionate widening of the fiscal deficit. It might be true for other countries, but not for India due to the NSSF, he said. 
 

However, an expert said in the current situation of states not borrowing much from the NSSF, the Centre had to withdraw from this fund. Otherwise, how will these savings fetch revenues, he wondered. 

For the next financial year, the Survey said, “… 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.”

It suggested to the government to go in for a modest consolidation that signals a return to the path of gradual but steady fiscal deficit reductions.

“Against this overall economic and political background, economic management will be challenging in the coming year. If the obvious pitfalls (such as fiscal expansion) are avoided and the looming risks are averted that would be no mean achievement,” it says.