In an interview to BusinessLine , Chief Economic Advisor Arvind Subramanian has reiterated his question of whether a fiscal target of 3.5 per cent of GDP for 2016-17 is the “right fiscal policy in these circumstances”. While this might sound contrarian for ‘the fastest growing economy in the world’, a projected growth rate of 7.0-7.5 per cent (against 8.1-8.5 per cent projected by the Economic Survey ) implies that the economy is doing no better than the last year. An unbending rigidity on meeting fiscal targets is not a great idea when the challenges to growth — sluggish world demand contributing to 12 straight months of negative exports, feeble signs of recovery in manufacturing, slump in agriculture and sluggish private investment — are too serious to be ignored. A similar sense of apprehension led to the current Budget laying out a slide path of three years, against the earlier two, to get to a fiscal deficit of 3 per cent of GDP. The mid-term review of the economy points out that the fiscal deficit target of 3.9 per cent of GDP is being met by squeezing revenue expenditure without compromising on capital spending. Public capex has acted as the chief growth driver, a trend that would have to be maintained next fiscal, given the negativities. The fiscal deficit target of 3.5 per cent of GDP for 2016-17 may have to be relaxed to keep up the capex drive, as revenue spending will rise on account of the pay panel outgo. The slide path can be extended by another year in the next Budget.
This makes sense for a number of reasons. The first is arithmetical: thanks to a negative GDP deflator, the nominal GDP is lower than the real GDP, which implies that the seriousness of fiscal deficit is perhaps exaggerated. The mid-term review concedes a sense of unease over growth and inflation numbers (is it inflation or deflation?), underscoring the need for counter-cyclical fiscal policy. There can be no better time to embark on accommodative policy than now. Inflation, except for food output, does not pose a threat, with global oil prices exploring new lows and imports likely to remain cheap — despite the prospect of the rupee losing value in 2016 when the Fed raises rates.
The current year’s Budget corrected the squeeze on public investment which characterised the last years of the UPA government. The forthcoming Budget should push public spending in the Railways, agriculture, education and health. Given India Inc’s struggle with indebtedness, the Centre needs to ‘crowd in’ investment in the short run, without, however, forgetting that its overall task is to act as regulator and facilitator, a point that was made in this year’s Economic Survey .