With little headroom for fiscal expansion given the falling tax collections, the government will have to cut its expenditure, says an economist. The fiscal deficit target of 3.4 per cent of GDP is likely to slip, DK Joshi, the chief economist at the rating agency crisil said on Friday.
"Fiscal policy doesn't have much space. Government is avoiding any fiscal stimulus to the economy and revenues are falling short. They will have to cut expenditure again just as they did last year unless they are able to realise a lot of money by privatisation or divestment or asset sales," Joshi said at an S&P Dow Jones Indices event.
He said the GDP growth, which slipped to 5 per cent in the first quarter, is expected to be worst in the second quarter- sub 5 per cent.
"We hope that it is going to be bottom out soon and we will see a very mild recovery," he said.
Joshi said with the stronger mandate, the Narendra Modi-led government has the ability to take stronger measures to push the economy.
"There is a lot of political capital. How it gets used, I think it needs to be seen?" he said.
On the medium term, the picture looks promising with the economy expected to grow at 7 per cent per year over the next five years. The country's growth trajectory would largely be influenced by the domestic factor as the global environment will be less favourable.
"With the clean up of bank balance sheet, the financial sector will be in a much better position to lubricate the economy and improve credit culture," he said.
Later speaking at a panel discussion, Citi Group's chief economist (India), Samiran Chakraborty, said choke in the credit is the primary factor for the current slowdown.
"I suspect if we can get credit flow back into the system then we will get back to significantly growth path," Chakraborty said.
Joshi further said as there is an end of a deleveraging phase and now corporates will start leveraging which will push the growth. He said to become a $5 trillion economy over the next 5 years, the country will need higher growth in addition to efficiency-enhancing reforms in land, labour and ease of doing business.