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January 25, 2017

Testing times

Budget 2017 comes against the backdrop of a slowing economy. The Central Statistical Organisation (CSO) has estimated the economy’s gross domestic product (GDP) growth to slow to 7.1% in fiscal 2017 from 7.6% in fiscal 2016. This estimate does not factor in the impact of demonetisation.

The Budget has two immediate tasks cut out: assuage the shock received by private consumption from demonetization, and bolster faltering investment demand. The advancement of the Budget presentation by a month gives the government that much more time to plan and implement its spending programmes before the beginning of fiscal 2018. So far so good.

Can the government do it and meet the FRBM target of 3% fiscal deficit target? Short of a miracle, “no”. India will have to prune its fiscal deficit by Rs 280-350 billion from the level in the previous fiscal[1] in order to reduce the fiscal deficit ratio (fiscal deficit/GDP, or FDR) to 3% in fiscal 2018, as per the Fiscal Responsibility and Budgetary Management (FRBM) commitment. 

That said, an additional spending window can be created if the target is relaxed to 3.5% (provided the FRBM committee recommends it). In that case, the government will have to demonstrate credible steps to lift the tax/GDP ratio in the coming years to ensure medium-term fiscal sustainability and reduce debt/GDP ratio.