New Delhi: Union Budget needs to increase spending by revising the fiscal deficit target to provide a boost to the economy hit by “tsunami” of demonetisation, according to rating agencies. Crisil pointed out that the Budget 2017-18 comes against the backdrop of a slowing economy. It said that the Budget has two immediate tasks cut out: assuage the shock received by private consumption from demonetisation, and bolster faltering investment demand.
“Can the government do it and meet the FRBM target of 3 per cent fiscal deficit target? Short of a miracle, ‘no’,” said the agency. Crisil noted India will have to prune its fiscal deficit by Rs 280-350 billion from the level in the previous fiscal in order to reduce the deficit ratio to 3 per cent in fiscal 2018, as per the Fiscal Responsibility and Budgetary Management (FRBM) commitment. “That said, an additional spending window can be created if the target is relaxed to 3.5 per cent. In that case, the government will have to demonstrate credible steps to lift the tax/GDP ratio in the coming years to ensure medium term fiscal sustainability, and reduce debt/GDP ratio,” it said.
Ind-Ra said that the major dilemma for the finance minister Arun Jaitley in the Budget FY18 is — will a fresh round of fiscal stimulus be required to offset some of the ill effects of the note ban. “The sudden decision of cancelling the legal tender of Rs 500 and Rs 1,000 notes and the chaos created thereafter due to the limited availability of new currency has caused significant disruption to the economy,” it said.
Ind-Ra said “the headroom for the government to provide a stimulus either from the consumption side or investment side is quite limited and if it a boost is to be provided then perhaps it will require compromising the fiscal deficit target and the fiscal consolidation process.” However, it said any move in this direction will have its consequences. “Moreover, unlike 2008, the slowdown in growth this time around is of our own making and the rationale for relaxing fiscal deficit target/consolidation process will not be viewed positively," added the agency.
Edelweiss said that keeping fiscal deficit at 3.5 per cent for FY18 instead of targeting the 3 per cent will be helpful.
