To make matters worse, the government doesn’t have much space to increase spending, given firm crude oil prices and a negative output gap, both of which could hit economic growth and be a drag on revenues.
“In terms of GDP, the social sector expenditure, primarily constituting health and education, in India continues to remain woefully below peers,” the central bank said in an assessment of the government’s budget for fiscal year started April 1. The report was published as part of the Reserve Bank of India’s April bulletin.
The budget was unveiled on February 1, in which Finance Minister Arun Jaitley targeted the rural sector and farmers, in a bid to placate angry voters and create more jobs before elections next year. The effort is simply not enough, if one were to go by the gist of the central bank report.
That move, however, came at a cost and one which would have broader implications including “on economy-wide costs of borrowing,” the RBI said. Last week, the central bank kept rates unchanged but warned the fiscal slippage could have a crowding out affect.
The budget shortfall will be 3.5 percent of gross domestic product in the year ending March 31, 2018, wider than the 3.2 percent target. The government will aim for 3.3 percent in the current year to March 2019, abandoning its earlier 3 percent goal.
The budget “is confronted with a tight trade-off between the rigors of fiscal consolidation and the demands for stimulating the economy,” the RBI said. While the waning of the drag from demonetization and goods and services tax implementation will have favorable effects on economic activity and boost tax revenues, terms of trade losses associated with the hardening of international crude prices could restrict fiscal space, it said.