India achieving a fiscal deficit target of 3 per cent of GDP for 2017-18 will be nothing “short of a miracle”, Crisil Research has said, ahead of the presentation of the Union budget, due next Wednesday.
The rating agency says an additional spending window can be created if the fiscal deficit target is relaxed to 3.5 per cent of GDP, in which case the government must demonstrate credible steps to lift the tax ratio in the coming years to ensure medium-term fiscal sustainability.
"India will also have to prune its fiscal deficit by Rs 280-350 billion from the level in the previous fiscal (2016-17) in order to reduce the fiscal deficit ratio to 3 per cent in 2018, as per the Fiscal Responsibility and Budgetary Management (FRBM) commitment," it added.
The ratings agency said the upcoming budget has two tasks cut out: Address the demand shock due to demonetisation and bolster faltering investment demand. At the same time, the advancement of the budget date gives the government more time to plan and implement its spending programmes.
"The good news, perhaps, is the bad news has already hit. Sagging areas of the economy have been identified and fiscal constraints clearly drawn. Sure, the budget has to perform a tight rope walk between kick-starting consumption-investment cycle and maintaining fiscal discipline."
Crisil Research also said that in the best-case scenario, some windfall from demonetisation can provide one-time fiscal space in 2017-18. Over the medium run, the proposed Goods and Services Tax regime and steps to improve compliance will help raise taxes.
"But expenditure will have to precede collection and compliance to spur growth, so some transitory relaxation of fiscal target may be inevitable in the coming fiscal. On the contrary, if it turns out that the government has been betting on the wrong horses, we might be bracing ourselves for an even tougher winter by the end of this year," it said.
"We bet on the former playing out," it added.
The Comptroller and Auditor General (CAG) has estimated the Centre’s fiscal deficit in FY16 to be Rs 53,146 crore higher than estimated in the Budget.
Fiscal deficit stood at 4.31 per cent of the GDP in FY16 versus the provisional actuals of 3.9 per cent, reported by the government, according to India’s top auditor.
The Centre’s financials, as reported by the Controller General of Accounts and audited by the CAG, varied widely in the last decade and the gap peaked at Rs 97,452 crore in FY09 (post-UPA-I election year that saw Rs 66,000 crore mega farm loan waiver). Going by the CAG estimate, the Centre missed the fiscal deficit target in FY16.
