Hence, the intense debate on whether the policy stance should remain pro-cyclical or there should be flexibility enough to accommodate for short-term challenges. The answer would lie in exploring the reasons for the slowdown. Arguably, corporates have been forced to pass on partially the cost reductions due to one of the sharpest fall in commodity prices via price cuts due to lack of demand and, hence, pricing power. This is reflected in the declining topline, even as profits swell.
The Finance Minister and his budget-making team has very limited amount of manoeuvrability, if they want to make realistic projections of revenue and expenditures in the Union budget. They would want to continue supporting aggregate demand. Thus, a cut-down on public infrastructure spending may be undesirable and unwarranted. Secondly, the Government of India would also have to make budgetary allocations to account for implementation of the 7th Pay Commission recommendations, including January-March 2016 arrears payments. Thirdly, overall spending in rural areas, battered by two successive years of drought and large-scale farmer distress, would need to be increased.
The government has very little levers available on the revenue side. The deflationary situation is likely to keep direct taxes depressed. With the likelihood of oil prices dipping further very limited, the cushion of excise rate hike and, hence, a higher collection on this count is limited. The government may take away some excise exemptions and help improve the tally. Service tax rate may be increased, to say 16 per cent, to align it to the proposed standard GST (Goods and Services Tax) rate, before the tax system is introduced. This, along with a further expansion of service tax base, may yield some increase in tax revenue. Given the higher volatility and the broad global risk-averseness anticipated for most part of 2016, aggressive divestment targets would be futile.
The government is likely to defer the fiscal consolidation roadmap by another year. Our estimates of fiscal deficit for FY16 and FY17 are 4.0 per cent and 3.8 per cent, respectively. There will still be consolidation of fiscal numbers, but at a slower pace. This will also be counter-cyclical.
As long as the spending mix of the government is improving in favour of higher capex (in infrastructure like roads, railways, ports, irrigation etc.), one should not be too concerned about the fiscal deficit ratio consolidating at a slower pace. This is likely to enhance the productivity of the economy in the medium to longer term and lead to a faster expansion of GDP in the denominator of the ratio.
(Jay Shankar is Chief India Economist and Director at Religare Capital Markets)
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.
