The Finance Minister’s 3.2 per cent fiscal deficit target for 2017-18, is no doubt a number that has pleased markets and investors. But can the Centre achieve this?

On the numerator, both the expenditure and revenue numbers are unlikely to rankle.

The Budget assumes a conservative 6.6 per cent growth in expenditure for 2017-18. Tax revenues, pegged to grow by 12.7 per cent, also appear reasonable. There could be some downside risk to the ₹72,500 crore divestment revenues, but overall windfall from demonetisation by way of dividends from the RBI or additional income tax has not been factored in. This could also offset some of downside expected from GST collections in the short term.

So where is the weak link? The denominator — GDP — could throw the fisc out of track, if growth slows down further.

The Budget has assumed a 10.2 per cent growth in nominal GDP for 2016-17. This is a more credible number than the CSO’s estimate of 11.9 per cent.

But the 3.2 per cent fiscal deficit target for 2017-18 has been worked out with an underlying assumption that the nominal GDP will grow by 11.75 per cent in 2017-18.

This growth estimate seems aggressive, considering that the Survey set a growth range of 6.75-7.5 per cent growth in real GDP for the next fiscal.

If one were to assume the lower 6.75 per cent growth in real GDP for 2017-18, then the growth in deflator (ratio of nominal to real GDP) — another measure of inflation — works out to 5.3 per cent, up from 3.5 per cent in 2016-17. This appears aggressive considering the underlying CPI/WPI trends.

At the higher growth estimate of 7.5 per cent, the growth in GDP deflator is a more realistic 4.5 per cent. But then the growth in real GDP looks aggressive given that the full impact of demonetisation is still unknown.

Uncertain growth outlook hence can upset the fiscal deficit /GDP ratio for 2017-18.

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