It no longer requires rocket science to conclude that the NDA government's Budget on 1 February is going to go easy on the fiscal deficit. Circumstances are such that the best option left for the government after a demonetisation gamble that at best can be described as limited success -- and with growth flagging -- Finance Minister Arun Jaitley's best bet would be to spend rather than squeeze to make India's economy stronger.
Some expert blessing for such a move came on Monday with the N.K. Singh panel on fiscal responsibility submitting its report with a broad hint best summed up in four words: "Spend more. It's okay!" Early reports indicate that the panel has suggested a fiscal deficit range of 3 to 3.5 percent of the GDP and what's more, advised against any rush towards fiscal consolidation.
Jaitley had last year proposed to narrow the deficit to 3 percent in 2017/18. What the Singh panel gives now is elbow room to retain it at current year's level of 3.5 percent. That gives an extra 0.5 percent of GDP for the government to spend. The GDP for the current year at current prices stands at Rs 151.93 lakh crore and 0.5 percent of that comes to Rs 75,000 crore. With a higher estimate for GDP in the year 2017/18, this would increase spending room further.
In plain English, this can mean that the government can go ahead and spend more to recapitalise ailing banks, splurge a bit on pro-poor initiatives or dabble in boosting infrastructure. News reports suggest that small businesses have been severely hit by demonetisation and added to the pile of non-performing assets or bad loans with banks.
With everybody from the IMF and Moody's to the Reserve Bank itself having downgraded India's GDP growth for 2016/17 in the wake of demonetisation, the real threat for an economy in which an estimated 10 million people are entering the work-force every year is unemployment rather than inflation. The government also needs to spend to heal wounds caused by demonetisation in rural areas even as it is constrained by falling tax revenues in a potential downward spiral triggered by the demonetisation.
However, two positive factors may aid government spending. Though demonetisation has caused human pain, an economic slowdown and political controversies, Jaitley can comfortably claim in his Budget speech that more money is coming the way of the taxman with the income tax department toothcombing high-value deposits made in the wake of demonetisation. A good spin in in his speech may increase spending room even more.
Last but certainly not the least, inflation is reasonably under control. The usual argument against high fiscal deficits is that it fuels inflation. Retail price-based inflation slowed to a two-year-low of around 3.4 percent in December. That is good news for consumers but it also suggests a scenario of slowing job growth and incomes.
From all indications, the government would gamble on growth with a rural focus in Jaitley's speech. Belt-tightening is comfortably off the agenda.
(The author is a senior journalist. He tweets as @madversity)
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Updated Date: Jan 24, 2017 17:16 PM