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Growth Over Fiscal Consolidation?

Monday, February 08, 2016
By Harsh Kundnani

Budget 2015

As the budget draws near, Arun Jaitley and his entire team face an uphill task of determining the underlying theme of the budget. The question which the Finance Ministry faces is whether it should step up capital spending? Whether it would be prudent to relax fiscal goals for a consecutive second year or should fiscal consolidation be the key in the upcoming budget?

Raghuram Rajan, Reserve Bank of India Governor, in the Credit policy meet last Tuesday kept the rates unchanged suggesting that the RBI remains accommodative depending on the outcome of the budget and urged the Government to stick to the path of Fiscal consolidation. Although this didn’t bode well with the Government officials, deviating from the fiscal targets for the second year in row could undermine India Governments’ credibility on the domestic as well as the International landscape, as the government increased the deadline of achieving the targeted fiscal deficit of 3% to three years from two years as manifested earlier. The RBI Guv also expressed concerns that any expansion via increasing the fiscal deficit may be ominous for bond markets as deviation from fiscal consolidation may push up bond yields.

Also, considering that the deficit in aggregate terms has actually increased in the last year and with schemes like UDAY being implemented, to revive power distribution companies, and the obligations of Pay commission to be met, the fiscal deficit would be pressurised even further.

However, sticking to the fiscal targets is a double edged sword. The Finance minister is also under pressure to accelerate economic growth which has stagnated considerably, by stepping up government spending. India has witnessed subdued growth around 7 – 7.5% in recent times, due to problems such as weak monsoons affecting rural economies and delayed or stalled projects. These problems have caused deeps concerns for the government which is currently under fire for not delivering as much as promised.

Nevertheless, the Government has some positives to look forward to as the decline in International crude prices and some commodities eases the subsidy burden giving the Government more legroom to work its way out of the situation as well as look for strategic disinvestment of companies like ONGC whose fundamentals significantly improve due the crude oil slump.

As the Government announces its capital spending roadmap for Financial year 2016, the focus will undoubtedly be on how the Government tackles the massive Infrastructure deficit which India is currently facing. The Government is expected to include plans regarding road projects, ports and railways in the budget. Also in focus will be the steps taken towards Public-Private Partnerships in sectors like Power, railways etc. and how much can the Government allocate for such projects while the sword of fiscal consolidation hangs on their neck.

Thus, while India faces a slump in growth as well as the danger of deviating away from the Fiscal consolidation roadmap, it remains to be seen whether the finance minister can successfully find a middle ground between the two, thereby addressing a prolonged snag or whether the situational irony of procrastination which India has been subject to since a number of years, will prevail.

(The author is a CA by qualification and a commentator on 'Eco-political' issues)

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