Expenditure likely to be re-scheduled after PM Modi's New Year sops

These sops could lead to higher borrowing & re-setting of the existing fiscal stabilisation schedule

The schemes and incentives announced by Prime Minister Narendra Modi in his December 31 address are the first chapter in a populist playbook that ends with the 2017-18 Budget.
 

Underwriting this plan is a likely expenditure spree, which could lead to higher borrowing and re-setting of the existing fiscal stabilisation schedule.

On Saturday evening, Modi presented a mini budget of sorts, at the end of the 50-day demonetisation exercise. His announcements were squarely focused on those most affected by the ban — farmers, small businesses, women, senior citizens, poor and the lower middle class.

There were interest rebates and waivers for low-cost housing and farmers, respectively, credit limit increases and tax incentives for small businesses, doubling the corpus of irrigation funds under the National Bank for Agriculture and Rural Development, cash directly into bank accounts of expecting mothers, and fixed high-interest rates on bank deposits for senior citizens. The Centre will fund or underwrite most of the announcements.

Spending on the latest initiatives and on others Modi might make in the run-up to the 2017-18 Budget, expected to be a  populist one, should not be a problem for planners in the finance ministry, say officials and economists.

A spending spike could be the central theme of the Budget. This means more of borrowing, with the Centre unlikely to stick to the fiscal deficit target of not more than 3% of gross domestic product for 2017-18, as mandated by the Fiscal Responsibility and Budget Management (FRBM) Act. 

A government official said the idea was to amend the Act to provide room for a spending push; a panel has been looking at the existing schedule. “Fiscal discipline is important but a boost or a stimulus in terms of higher capital expenditure is the need of the hour. A wider deficit than the one mandated by the current FRBM road map, will also enable higher borrowing,” the official said.

The panel reviewing FRBM is yet to give its report. Chaired by N K Singh, a former MP and an ex-revenue and expenditure secretary, it is studying the impact of demonetisation and is likely to agree with the wider assessment that capital spending needs to be stepped up. It is expected to recommend certain conditions under which extra spending is necessary.
 

In a pre-Budget meeting with Finance Minister Arun Jaitley, economists and others are said to have advised the government to stop worrying about fiscal deficit targets and focus on increasing capital expenditure and social sector spending.

The idea is that despite years of effort to rein in fiscal deficit, the rating agencies have not upgraded their long-term sovereign ratings. In such a scenario, and at a time when major developed and developing economies were increasing their federal spending, India should do the same.

The focus of the Centre’s spending, economists told Jaitley, should be on infrastructure, job creation and the social sector. With private sector balance sheets still weak, the government would not only have to maintain its public spending but perhaps increase it.

“The government should not hold the three per cent target for the next year as sacrosanct. There is a need for higher productive expenditure at a time when private sector balance sheets still remain week,” said Soumya Kanti Ghosh, chief economist at State Bank of India.