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India plans expansive budget despite growth, revenue worries
27.01.17 11:25 Asia rising

India’s finance minister is likely to borrow more than originally planned when he presents the budget on February 1, senior aides and officials said, counting on revenues from a national sales tax that has yet to start.

Arun Jaitley is looking at how to fund giveaways to taxpayers and higher public investment to help nurse Asia’s third-largest economy back to health after the government’s shock decision in November to abolish high-value banknotes.

That is raising concern among some economists and investors that the government will take too many fiscal risks. Yet officials say that, given the choice, they would choose growth sustained by state investment over a fiscal straitjacket.

“Some degree of flexibility on fiscal discipline should not be seen as irresponsible fiscal management,” one senior government official told Reuters, requesting anonymity due to the sensitivity of the matter.

A fiscal advisory panel, which includes central bank head Urjit Patel, has advocated widening the budget deficit to “slightly over” 3% of gross domestic product to free up funds for road, railway and irrigation projects.

“It is not possible to keep up the pace of capital expenditure without increasing the fiscal deficit beyond 3% of GDP,” another official, briefed on the committee’s findings, added.

New Delhi earlier aimed to cut the federal deficit to 3% of GDP over the next two fiscal years, compared with 3.5% in the year now drawing to a close.

Independent economists are also penciling in a higher federal deficit in the coming fiscal year, at 3.3-3.4% of GDP, creating room for the government to invest an extra US$6 billion.

That has drawn a warning from ratings agency Standard & Poor’s, which says that slowing the pace of fiscal consolidation could delay India’s chances of an upgrade due to its high and rising debt levels.

Heroic assumptions

Indian Finance Minister Arun Jaitley at the Vibrant Gujarat investor summit in Gandhinagar, India January 11, 2017. Reuters/Amit Dave
Indian Finance Minister Arun Jaitley at the Vibrant Gujarat investor summit in Gandhinagar, India January 11, 2017. Reuters/Amit Dave

Jaitley’s team forecasts a recovery in nominal GDP growth, the key driver of tax revenues, to around 12% in 2017/18.

Yet that assumes oil prices of US$55-US$60 per barrel and a long-delayed Goods and Services Tax being implemented in July. Oil, India’s most expensive import item, could overshoot the finance ministry’s expectations as exporting nations curb output.

And the economy is still getting over the shock of Prime Minister Narendra Modi’s decision in November to scrap 86% of cash in circulation in a bid to purge the economy of illicit “black money.”

The International Monetary Fund has chopped a percentage point off India’s forecast of real economic growth to 6.6% in the current fiscal year to March, meaning China looks set to regain the crown as the world’s fastest-growing large economy. The Washington-based lender has also shaved 0.4 of a percentage point off its forecast for the coming fiscal year.

 
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