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Will the Finance Minister stick to the pre-announced fiscal consolidation path on Monday or is the stage set for fiscal slippage? Speaking to Bloomberg TV India, ANZ senior economist for Asia-Pacific Devika Mehndiratta said she is not expecting big spending for the rural sector. If the FY17 fiscal deficit target stays at 3.8-3.9 per cent, then the market reaction is likely to be more negative.
Even as we are talking about the fiscal slippage, I just want to bring in the global angle as well. We heard earlier that geopolitical and credit-cycle risk remains. On the other hand, we have heard comments from the People’s Bank of China that the economy is still looking good as it is trying to reassure the markets. How much of an impact do you see playing out on India and our own growth?
Not that much from the Budget point of view. The choice that the Finance Minister has really is — should you slip a little from fiscal consolidation to support what clearly is not a very strong growth. Growth concern is still there. Or should you worry about the risk of losing credibility if you stray from the fiscal path?
And I think that’s really the two key driving factors. And of course to the extent that market global situation is a bit volatile. One can argue that maybe there is a bit of a leaning towards sticking to the path. As RBI Governor Raghuram Rajan said, you do not fritter away the very hard-earned stability that India has gained since the mess we were in 2013.
What are the risks posed by a slow fiscal consolidation?
You are saying what if the fiscal deficit is not reduced to 3.5 per cent of GDP but to something like 3.7 per cent in FY17 from 3.9 per cent budgeted for FY16. Yes, obviously the cost really is if markets don’t digest that well. I think if it is something like 3.7 per cent, markets might digest that well and you might not have that stronger reaction on the yield curve. If it is 3.8 per cent or higher, let’s say, 3.9 per cent, which is not lower than what you have this year and you are moving in that direction of reducing the fiscal deficit, then I think the market reaction is likely to be more negative. Then you have all negative spin-off effects of crowding out private investments at a time when you do not really want to be doing that. But I think if the government manages to stay 3.7 per cent or below it might not be that bad as a situation.
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