Photographer: Dhiraj Singh/Bloomberg

Time to Review India's Budget Deficit Targets, Advisers Say

  • FY17 growth seen between 7% to 7.75%, inflation 4.5% to 5%
  • Survey lays out reasons for and against the fiscal road map

India must review its fiscal deficit targets in the coming years, Finance Minister Arun Jaitley’s advisers said in a report three day before he presents the annual budget.

While the need for lower debt metrics calls for the government to stick to its announced path, a scheduled pay increase for state employees and pressing infrastructure requirements could make this tough, a team led by adviser Arvind Subramanian wrote in a report released Friday. A middle path would be to opt for slower consolidation, they wrote.

"There are very good arguments for a strategy of aggressive fiscal consolidation, as earlier envisaged, and equally good arguments for a strategy of moderate consolidation that can place the debt on a sustainable path while avoiding imparting a major negative demand shock to a still-fragile recovery," they wrote. "The Union Budget will carefully assess these questions."

One option would be to narrow the deficit by 0.2 or 0.3 percentage points of gross domestic product each year over the next five years, which would take the gap to 3 percent of GDP by March 2021, they wrote.

India’s current plan aims to shrink the gap by 0.4 percentage points in the year starting April 1, to 3.5 percent from an estimated 3.9 percent. It targets 3 percent by March 2018.

Jaitley is under pressure to bolster state finances without curbing stimulus spending amid mixed signs of economic strength. While India is forecast to overtake a slowing China as the world’s fastest-growing big economy, back-to-back years of poor rainfall have eroded incomes of the bulk of the nation’s population.

An expected increase in government worker’s pay will boost consumption demand and add 0.5 percentage point to GDP due to higher disposable income in the hands of 4.7 million employees and about 5.2 million pensioners, the survey said. The impact on inflation is likely to be limited as the government pay hikes will not impact wages offered by private companies, it said.

The survey estimates GDP to expand 7 percent to 7.75 percent in the coming year. Inflation is forecast at 4.5 percent to 5 percent, around the central bank’s target.

The survey advised easier monetary policy, saying oil prices would keep costs low, even though the magnitude may decline in the coming year. Brent crude has fallen more than 41 percent over the past 12 months, allowing India to cut retail prices even as it raised taxes to boost revenues.

Reserve Bank of India Governor Raghuram Rajan kept interest rates unchanged on Feb. 2, signaling he’d watch the budget before adding to last year’s four interest rate cuts.

(A previous version of this story corrected the upper range of the GDP forecast to 7.75 percent)

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