The 3.2 per cent question: Should the government chase fiscal deficit or growth?

THE OLD bogey of growth versus meeting fiscal deficit targets is back in the run up to the BJP’s last full budget. Balancing economic fundamentals and macro-economic parameters, including fiscal deficit, is a consistent and continuous exercise which requires fiscal prudence. The Indian economy has the wherewithal to weather out any uncertainties that doomsayers have been peddling in the last few weeks.

Keeping the fiscal deficit within the targeted 3.2 per cent may look a wee-bit difficult given several uncertainties. But, as finance minister Arun Jaitley pointed out, he has the elbow room to keep the government’s finances intact.

Newly appointed finance secretary Hashmukh Adia echoed this sentiment as well. There’s only an outside chance that Centre may overshoot the borrowings beyond targeted Rs 580,000 crore and deviate from the fiscal consolidation plan. With one eye on the ratings agencies, the government remains watchful, however one needs to add that India has received only one upgrade from them in the last 25 years.

Interestingly enough, this has to be achieved without choking the expenditure plan as it might have an adverse impact on growth that’s already hit a low at 5.7 per cent in first quarter i.e. April– June 2017. With private investment demand more or less moribund, public spending is the only way forward and this may be the government’s biggest dilemma at this point: Cut back or pump prime spending to lift growth.

While economic expansion has to be kept up to boost consumption, balancing it out with fiscal consolidation is the challenge. Several analysts and brokerages have predicted that the fiscal deficit target may be breached by 0.2 – 0.3 per cent.

Finance ministry estimates have suggested gradual pick up in indirect revenues in the aftermath of goods & service tax (GST) rollout on July 1. From Rs 94,063 crore in August to Rs 95, 131 crore in October, the GST mop has begun to improve putting indirect tax revenues on a firm footing. Narrowing of shortfall in state revenues to 17.6 per cent in the last three months would mean lesser stress on centre’s revenue pool. The projected Rs 20,000 crore revenue losses due to reduction in rates on GST last week may turn out to be notional given expanded volumes. Even if the direct tax revenues growth happens within the targeted level, concerns on over all tax revenues may by and large be unfounded.

Apprehensions on possible shortfall in divestment targets have been aired quite often. After the recent HPCL–ONGC merger, the insurance companies IPOs line up and approved strategic sale in blue chips, the picture seems more optimistic. Given that 45 per cent disInvestment target has already been crossed, there’s no reason why the rest cannot be achieved in the next four months on the back of current bull run in the market.

As a back up option, there’s nothing wrong in Centre seeking transfer of Rs 44,000 crore surplus built up in RBI books. While already Rs 30,659 crore has been paid in July this year, another Rs 44,000 crore from RBI profits on government investments would provide a huge breather. Though the RBI union is opposed to this move.

Going by officials’ optimism, firming up of crude prices may turn out to be a key irritant for finance minister Jaitley. Every dollar increase in crude prices would no doubt translate to $1.2 billion additional outgo on oil import bill. Having managed government finances when crude touched $120 per barrel, at half the rate prevailing now the pressure is that much less. Also, Jaitley has not passed on the entire benefit of lower crude prices at $30 – 40 per barrel during first six months. Savings accrued owing to direct transfer of subsidies on food, fertilisers and oil accounts will largely negate possible adverse impact of firmed up crude prices.

Jaitley may have to purge administrative expenses through austerity measures, double realisation from tax disputes and allow the state-run PSUs to keep their capital expenses plan on track. Seeking special dividends from state run PSUs constraining their capacities to invest may not be a very good idea. However, companies that are unable to create productive capital assets have no way to stop finance minister from seeking additional dividends.

Fiscal picture looks eminently manageable. Any mismanagement at this stage through profligacy will turnout to be a disaster and a political suicide.