Why economists are against deferring fiscal goals

According to the fiscal consolidation road map outlined in Budget 2015-16, the fiscal deficit road map was deferred by a year, compared with a road map laid by Finance Minister Arun Jaitley's predecessor P Chidambaram.

Economists have cautioned that any deferment of the government's fiscal goals would prove counter-productive and raise the interest payment burden.

The comments came as Chief Economic Advisor (CEA) Arvind Subramanian recommended re-assessment of the fiscal consolidation road map on account of declining nominal economic growth.

In the Mid-year Economic Analysis, 2015-16, Subramanian said the government's commitment to go for further fiscal consolidation of 0.4 per cent of gross domestic product (GDP) needed to be re-assessed on account of factors, including the Seventh Pay Commission outgo and declining nominal GDP growth.

The Centre's fiscal deficit was projected to come down to 3.5 per cent of GDP in 2016-17 from 3.9 per cent targeted for the current financial year. The CEA, however, excluded confidence that the fiscal deficit target for the current financial year would be met.

He was not sure of meeting the next year's target. Govinda Rao, a former member of the Prime Ministers' Economic Advisory Council (PMEAC), said: "I do hope that they do not imply that government postpones the fiscal deficit (road map). History has shown that unless you can control the fiscal deficit, you will suffer."

Even high growth would be a victim of any deferment of fiscal consolidation. "High growth will decline when you do not have control over the fiscal deficit.

The debt-GDP ratio will bloat and interest payments will become impossible," Rao added.

According to the fiscal consolidation road map outlined in Budget 2015-16, the fiscal deficit road map was deferred by a year, compared with a road map laid by Finance Minister Arun Jaitley's predecessor P Chidambaram.

Originally, the deficit should have come down to 3.6 per cent in the current financial year and then three per cent by the next.

The CEA revised down the nominal GDP growth to 8.2 per cent in 2015-16 as against 11.5 per cent estimated during the Budget, significantly contracting the denominator, putting pressure on the fiscal ratio.

Pronab Sen, chairman, National Statistical Commission, said there was no need to reassess the fiscal road map as nominal GDP would be higher next financial year unless oil or commodity prices weakened further.

"I do not see a reason to reassess the fiscal road map. This year, inflation has been unusually low… but perhaps there has been an upturn."

Sen added that inflation used for deflator next year would probably be 3.5-4 per cent and nominal GDP growth 10-11 per cent.

Arvind Virmani, former chief economic advisor, said for 2016-17, the government would have a choice between sticking to the fiscal deficit target, with a loose monetary policy, and slipping the fiscal target, with a tight monetary policy and higher government spend on infrastructure.

"In my view the former choice is a better one for revival of corporate investment and growth," he said.

On the one percentage points reduction in GDP growth target to 7-7.5 per cent for the current financial year, Sen said lowering the target was a realistic move as 8.1-8.5 per cent estimate was an over-assessment.

Saumitra Chaudhuri, former member, Planning Commission, said the downward revision was largely to do with the weak growth expected in the third quarter on account of poor monsoon. "The revision is largely to accommodate potentially weak Q3 due to bad monsoon, affecting crop output," he said.

The first half recorded a 7.2 per cent GDP growth.

Minister of State for Finance Jayant Sinha on Friday acknowledged that the assumption of good monsoon turned out to be wrong.

"Assuming that all the financial sector reform measures outlined in the Budget (eg bankruptcy law) and elsewhere are implemented, I expect a steady but slow recovery of corporate demand, investment and growth during 2016-17. There is nothing in the data so far to suggest a very sharp pickup in private investment in 2016-17," added Virmani.