Economists urge FM to stick to fiscal target medium term

Contraction in demand, accelerating inflation pose dilemma for government.

Updated - September 23, 2016 12:13 am IST

Published - January 13, 2016 11:00 pm IST - NEW DELHI:

The government continues to adhere to the path of fiscal consolidation, says Arun Jaitley

The government continues to adhere to the path of fiscal consolidation, says Arun Jaitley

Economists urged the government to stick to its fiscal consolidation targets in the medium term while supporting the idea of providing some budgetary leeway in the short term to help pump prime the economy as private investments remain elusive in the face of tepid demand.

The general view among economists was that the contraction in domestic demand coupled with accelerating inflation posed a dilemma for the government.

Inflation, which is slowly gathering pace, will make it difficult for the Reserve Bank of India (RBI) to cut rates and spur demand through monetary actions. The other option of giving a fiscal push through public spending is also tricky if the fiscal deficit target has to be met.

“The government continues to adhere to the path of fiscal consolidation,” Finance Minister Arun Jaitley said in his opening remarks at a pre-Budget consultation with economists. “The Budget 2015-16 targeted a fiscal deficit of 3.9 per cent of GDP compared to four per cent in 2014-15 in spite of the pressing need for enhanced public investment to boost economic growth.” The achievement was all the more significant after devolution of 42 per cent of taxes to states as recommended by the 14th Finance Commission, Mr. Jaitley said.

“While there were some people at the meeting asking for fiscal deficit target to be pushed, others were asking for the government to stick to it,” said S. Mahendra Dev, Director of the Indira Gandhi Institute of Development Research. “We have said that there can be some small deviation but the government must adhere to its medium term targets.” Official data released on Tuesday showed that industrial output in the country shrank by a sharp 3.2 per cent, the worst contraction recorded since October 2011. At the same time, retail inflation accelerated to 5.6 per cent in December 2015 from 5.4 per cent in November 2015.

“The decline was expected because the base effect was not favourable and the core sector data also suggested poor demand,” D. K. Joshi, Chief Economist at Crisil, told The Hindu. “ But nobody expected such a sharp decline. One of the reasons for that could be the Chennai floods because it is a big industrial area,” he said. The fiscal deficit in April-November 2015-16 stood at 87 per cent of the Budget Estimates compared to 98.9 per cent in the corresponding period of the previous financial year, Mr. Jaitley said.

Interestingly, while the economists called for a conservative approach to the fiscal deficit target, they also recommended that the government increase its expenditure, especially to increase agricultural productivity and enhance support to the social sector.

“Increased government expenditure is needed, and as long as capital formation is taking place, that is good,” Mr. Dev said. “The government can also reduce its subsidies,” he added.

“The Indian economy is on a path of recovery despite uncertainty and volatility in the global economic situation. India recorded a higher growth of 7.3 per cent in 2014-15 as compared to 6.9 per cent growth achieved in 2013-14 and 5.1 per cent in 2012-13, despite the slowdown witnessed in the world economy, pointing towards resilience of the Indian economy,” Mr. Jaitley said.

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