Govt may breach fiscal deficit target, spur demand

Govt may breach fiscal deficit target, spur demand

By SHAILENDRA TYAGI | NEW DELHI | 20 February, 2016
Critics of the possible government move to spur demand by relaxing fiscal deficit target say that the RBI may not take a very benign view of the government’s desire to boost its spending and may punish the economy with higher interest rates. REUTERS
In an ongoing crisis of sluggish demand, the government’s spending is essential to convince private capital to come forward and participate in reviving the economy.

To bring economic growth to a desirable path, some experts want the government to offer a boost to public spending in the next year’s budget to be unveiled on 29 February 2016. Though the proposed move might increase the fiscal deficit (roughly the difference between government’s revenues and expenditure) target for next financial year, yet it is seen as a desirable attempt to spur India’s economic growth. In his budget speech last year, Finance Minister Arun Jaitley vowed to keep the Centre’s fiscal deficit at 3.9%, for 2015-16 reducing it further to 3.5% for 2016-17. The government thinks that public spending for creating urban and rural infrastructure is likely to create a ripple effect of demand in other construction industries like steel, cement and host of industries in micro, small and medium enterprises segment.

“The government’s inclination to relax the deficit target, should it take place, shows its pragmatism to create an economic momentum when both global and domestic headwinds are threatening India’s growth prospects,” says Dr Jayshree Sengupta, senior fellow, Observer Research Foundation. She adds that India can certainly put-up with a bit higher deficit if it helps in achieving growth.

Critics to such an approach feel that deviation from the fiscal consolidation path would mean more government borrowings to spend on infrastructure, which would never allow interest rates to come down in the country. Though the depressed oil prices have brought additional revenues for the government, yet its ambitious spending agenda—infrastructure spending, pay commission commitments and recapitalising banks—might force it to borrow the shortfall from the market. Such an outcome would never favour the private sector’s need for cheaper capital and would also keep the inflation high in the long run. So, they argue that the RBI may not take a very benign view of the government desire to boost its spending and might well punish the economy with higher interest rates. India needs huge investments in many of its capital starved sectors and the cost of capital plays a major role there.

Supporters of the suggestion to relax the fiscal deficit norms argue that commitment to the fiscal deficit target makes sense when the economy is on an upswing, but in an ongoing crisis of sluggish demand, the government’s spending is essential to convince private capital to come forward and participate in reviving the economy. “Moreover, the investments needed in the rain-dependent agricultural sector would only come from government,” adds Dr Sengupta. Given the great stress that India’s public sector banks are going through, analysts do not foresee a major pick-up in credit disbursement to industries. In such a situation, the government’s role as a major investor would provide a great relief. Governments all over the world are offering incentives, monetary or fiscal, to revive growth in their respective countries.

 

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