Don't bother missing deficit target, go for growth, say economists in poll. Is Arun Jaitley listening?
Union Finance Minister Arun Jaitley would get away with letting his borrowing targets slip when he presents his budget next month, according to the overwhelming majority of economists in a Reuters poll.
Half the 30 economists surveyed also said the most pressing priority for Jaitley’s third budget was to invest in infrastructure — endorsing the pro-growth course he set a year ago.
That was more than the combined share of votes in favour of consolidating the budget or overhauling the tax system, two issues that have dominated the headlines in India but carry less weight with the financial community.
The findings raise questions over whether Prime Minister Narendra Modi would be well advised to force the pace on austerity at a time of weakening nominal growth, soft revenues and slumping export demand.
“We’ll take a longer route to consolidation; otherwise the economy would be negatively affected,” said Rishi Shah, an economist at Deloitte who took part in the poll and forecast upward revisions in the deficit.
A poll conducted before the 2015 budget also highlighted growth as the top priority, while a slim majority saw the government meeting high hopes for economic reforms.
Jaitley, under fire for what some critics call his lacklustre stewardship of India’s $2 trillion economy, should keep his job for at least another year, according to 18 of 27 respondents to a question about his future.
Only one-third expect this to be the last budget for the 63-year-old Finance Minister, the government’s chief policy spokesman and point person for dealing with foreign investors.
Jaitley has so far failed to win cross-party support for a ground-breaking Goods and Services Tax.
Senior sources in the government and the ruling party have said Jaitley may move to the defence department after this budget, with Power and Coal Minister Piyush Goyal one contender to take over at finance.
Slipping and sliding
Contrary to advice from Modi’s top economic adviser, Arvind Panagariya, that the government should avoid “tinkering” with the fiscal deficit, analysts expect the shortfall to be revised up from the trajectory set a year ago.
The consensus view was for the 2016-17 fiscal deficit to be raised to 3.7 per cent of gross domestic product (GDP) from a previous goal of 3.5 per cent. Gross borrowing is predicted at Rs. 6.49 lakh crore ($95.2 billion).
In the following year, the deficit would be revised up to 3.5 per cent from 3 per cent, the poll showed.
Twenty six of the 29 respondents said markets and ratings agencies would accept some slippage in the deficit to allow the government to invest in growth and jobs. But there’s not much wiggle room, with India’s shortfall on the high side compared to emerging markets like China and Russia.
“A typical solution to weak growth and comfortable inflation would be a loose fiscal policy and a tight monetary policy,” said Abhishek Upadhyay at ICICI Securities. “The trouble in India is that you don’t have the fiscal space.”
Although India is growing in real terms by over 7 per cent — having overtaken China to become the world’s most dynamic economy — it is creating too few jobs for a workforce growing by a million people every month.
While most economists expect Jaitley to stay, those ready to countenance the idea he might be replaced would prefer a technocrat to fill the role. They outnumbered those backing a professional politician by about two to one.
A narrow majority said Reserve Bank of India Governor Raghuram Rajan would make a suitable finance minister, outnumbering sceptics by 14 to 11.
Unconfirmed speculation has ebbed and flowed on financial markets that Rajan, whose term expires this autumn, might be in line for a move to the Finance Ministry.
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