So that it can spend for growth, Government to ease deficit targets

As the Narendra Modi government prepares the ground for massive public investment.

Written by P Vaidyanathan Iyer , Shaji Vikraman | New Delhi | Published: January 2, 2015 3:30 am

The Finance Ministry is likely to announce a medium-term “fiscal glide” path in the 2015-16 budget by tweaking the rules relating to India’s fiscal laws if needed, as the Narendra Modi government prepares the ground for massive public investment to boost growth in the backdrop of a prolonged slowdown and reluctance of the corporate sector to start spending.

What this could mean is that deficit targets starting next fiscal may be eased for a limited period until there is a rebound in growth with a commitment to getting back on track over the medium term.

For 2014-15, Finance Minister Arun Jaitley will stick to the fiscal deficit target of 4.1 per cent of the GDP. But in the next year or two, the target of lowering the fiscal deficit by 0.3 per cent of GDP may not be specified.

The Fiscal Responsibility and Budget Management Act or the FRBM mandates that the government lower its fiscal deficit by 0.3 per cent and revenue deficit by 0.5 per cent of GDP every year.

While Jaitley has often publicly signaled his commitment to fiscal consolidation, the finance ministry has now come around to the view that given the slowdown over the last couple of years, and the inability of the corporate sector so that it can spend to kickstart growth, Govt to ease deficit targets to kick start investment due to their debt-laden balance sheets, the much-needed thrust can come only from the government investing in public projects.

To do this, the government will have to create extra fiscal space which can be achieved only through easing rules as it struggles to raise revenues.

In this year’s budget, the government had projected a growth of close to 20 per cent in gross tax collections. But so far the actual growth has been a tad under 6.5 per cent prompting the government to wield the axe on spending in the last couple of years, to meet the fiscal deficit target. It has already taken several austerity measures, and a substantial cut in total expenditure for the year is expected to make up for the revenue shortfall.

During the UPA regime, in his second Budget, P Chidambaram had applied the “pause button” from meeting the FRBM targets stating the additional burden on account of transfers to states based on the recommendations of the Twelfth Finance Commission would make it difficult for the government to stick to a commitment to eliminate revenue deficit by 2008-09.

According to fiscal experts and senior government officials, it may be possible to lay down a medium term glide path for fiscal consolidation by informing Parliament. The FRBM Act mandates the government explain any deviation from prescribed deficit targets.

Though the government reckons that markets and even sovereign credit rating agencies place great value in such targets, officials said a medium-term plan could pass the test if credible and structured well.

What will embolden the government is support from many states which have pitched for relaxing their state FRBM targets as they have been badly hit by the slowdown. Lower crude prices, petro products and a slump in realty has hit states badly as close to a third of their revenues come from such taxes.

In the mid-term review unveiled by the government a few weeks ago, the finance ministry had said that considerations should be given to address the neglect of public investment in the past and also to review the medium-term fiscal policy to find space for it.

The review also made out a strong case not just for counter-cyclical, but also counter-structural fiscal policy motivated by reviving medium term investment growth. This needs to be actively considered, it had said.

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