Budget 2016: Economists back relaxing fiscal deficit targets to push public spending

NEW DELHI: The government should focus more on public spending to push growth and if required change the goalpost for the fiscal deficit target, some economists have suggested in their customary pre-budget interaction with finance minister Arun Jaitley.

There has been rising support for relaxing fiscal consolidation targets to step up public spending on infrastructure after the mid-year review of the economy authored by chief economic advisor Arvind Subramanian mooted the idea.

The fiscal consolidation roadmap sees fiscal deficit falling to 3.5 per cent of GDP in FY17 from 3.9 per cent in the current fiscal. This compression along with 0.65 per cent of GDP impact due to the 7th Pay Commission award, it is feared, will adversely impact public spending on infrastructure.

In his opening remarks Jaitley noted that Indian economy is on the path of recovery despite uncertainty and volatility in global economic situation, the finance ministry said in a statement.

The minister observed that the government continues to adhere to the path of fiscal consolidation in spite of the pressing need for enhanced public investment to boost the economic growth.

"This achievement is all the more significant as the government fully implemented its tough commitments on account of requirements of federal structure," Jaitley said.

The government has opted for greater tax devolution — from 32 per cent to 42 per cent — of the divisible pool to states following the recommendations of the Fourteenth Finance Commission. It has Despite that the Centre is committed to keep the fiscal deficit at 3.9 per cent of the gross domestic production (GDP) in 2015-16 and bring it down to 3.5 per cent in the next fiscal although it may incur huge expenditure on account of implementation of the seventh pay commission and one rank one pension (OROP) scheme.



"Some members suggested not to go for aggressive fiscal consolidation and continue on public spending while some of the members were of the view that higher growth can be achieved even by following the path of fiscal consolidation," the finance ministry said in its statement without mentioning Jaitley’s response. After the meeting, director of Indira Gandhi Institute of Development Research, S Mahendra Dev, said: "One is fiscal deficit. Basically, we said there can be some deviation but one has to adhere to fiscal deficit target in the medium term. Some deviation can be there for 2016-17." J P Morgan chief economist Sajjid Chinoy said every issue was discussed and that there was massive divergence among economists on some issues.

Economists present included prof Abhijit Banerjee of MIT, Rinku Murgai of World Bank, Ajit Ranade of Aditya Birla Group, Sajjid Chinoy of JP Morgan, and Sonal Varma of Nomura.

The finance ministry said other issues discussed included declaration of ‘Bad Banks’, to arrest bad loans and to make disinvestment of companies in small phases through the year so targets can be attained. Suggestions included bringing changes in small savings rate.