Run-up to Budget 2018-19: India's medium-term fiscal outlook under a cloud

Budget 2018

It is now increasingly looking unlikely that the Centre will be able to meet its targets for key macroeconomic variables for 2017-18, as detailed in the medium-term fiscal road map last year. This, in turn, will impact the government’s ability to meet the 2018-19 targets as well.

First, economic growth has dipped in the current financial year. It is unlikely to pick up sharply in FY19, as the economy struggles to deal with the twin shocks of demonetisation and the goods and services tax (GST).

Second, a sluggish economy, coupled with the uncertainty under the new indirect tax regime and lower dividends from the Reserve Bank of India (RBI), will probably ensure that the government fails to meet its revenue target this year. Failure to do so reduces the likelihood of the government sticking to its fiscal deficit target, unless expenditure is curtailed drastically.

Lower revenue collection, in turn, puts upward pressure on government borrowing, ensuring that it deviates from the glided path of debt reduction.

Growth slows down

Over the course of the past one year or so, economic activity in India has been severely disrupted due to demonetisation and the shift to the GST regime.

The Advance Estimates released by the Central Statistics Office (CSO) showed the economy was likely to grow at 9.5 per cent (current prices) in FY18. In comparison, the government in its medium-tem outlook last year, had projected a growth rate of 11.75 per cent (current prices).

From a purely statistical standpoint, this 2.25 percentage point difference implies a deterioration in key fiscal metrics. Take, for example, the fiscal deficit. If the government retains its Budget Estimate (BE) of Rs 5.5 trillion, the slower GDP growth would imply a deficit of 3.29 per cent of GDP, as opposed to 3.24 per cent earlier. To put it differently, the government would have to reduce its absolute deficit by Rs 77.7 billion to keep it at 3.24 per cent of GDP.

The fiscal outlook had projected GDP to grow at 12 per cent in FY19 and FY20. But given the state of the economy and a revival in investments unlikely in the near term, economists are sceptical of growth matching projections.

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