Govt may stick to deficit target, step up bank reform

India is likely to stick to its fiscal deficit target of 3.2 per cent of GDP, and may accelerate sales of government stakes in lend?ers and other firms as part of an effort to recapitalise ba?nks, an adviser to the prime minister said on Tuesday.

Prime minister Narendra Modi’s government has already used up nearly all of its budget for the current financial year and tax revenues are expected to fall far short of initial expectations. At the same time economic growth has slowed, sparking calls for more stimulus.

But Surjit Bhalla, a member of Modi’s Economic Advisory Council (EAC), told Reutersthe government had stuck to its fiscal deficit targets over the past three years and is expected to do so this year as well.

The central bank has wa?r?ned that missing the fiscal deficit target could lead to a spike in inflation, hurting macro-economic stability. Indian stocks slid last month on reports that a Rs 50,000 crore ($7.7 billion) stimulus package might be in works – one that would widen the deficit to 3.7 per cent of GDP.

Economic growth slipped to its lowest level in three years in the first quarter, logging an annual rate of 5.7 per cent, but Bhalla said the?re were signs of recovery.

“I am more optimistic on the economy than I was two weeks ago,” he said, adding that last week’s industrial output and export data suggested fears about a slowdown were exaggerated.

Speaking at his office in New Delhi, he said GDP growth could be close to 6.5 per cent for FY18 – although that forecast is lower than the central bank’s latest estimate of 6.7 per cent.

Modi formed EAC last mo?nth to address issues of macroeconomic importance and present its views to the prime minister. Bhalla said its chairman, Bibek Debroy, has communicated the co?uncil’s views on the fiscal deficit to the government.

Sour loans in the banking sector hit a record Rs 9.5 trillion ($146 billion) at the end of June with stressed loans as a percentage of total loans at 12.6 per cent – the highest level in at least 15 years.

That represents a major problem for Asia’s third larg?est economy, as provisions eat into profits and new lending is choked off. The country’s 21 state-run banks hold the bulk of the sector’s bad loans. Asked how much it would take to recapitalise state-run banks, Bhalla said: “My reading is that it would probably require about Rs 1 trillion ($15.4 billion).”