Fundamentals strong, but fiscal situation a worry: Macquarie

MUMBAI: Notwithstanding the strong fundamentals owing to contained inflation and manageable current account deficit, India’s fiscal situation remains vulnerable with the country’s general government fiscal deficit remaining high at 7.4% of the gross domestic product ( GDP) in the financial year ended March, said Macquarie in a report.

The general government fiscal deficit combines that of the Centre and states. Factors such as higher wages and pensions under the 7th Pay Commission and One Rank One Pensions schemes, power sector reforms under Ujwal Discom Assurance Yojana, recapitalisation requirement of public sector banks and upcoming state elections are unlikely to allow the general government fiscal gap to consolidate meaningfully in the coming years, the brokerage said.

In the current financial year, the brokerage estimates the general government deficit will rise further to 7.7% of the GDP.

Macquarie said that while the weak fiscal position and high public debt compared to peers are not immediate threats to India’s debt sustainability, it reduces scope for countercyclical policy to support growth and may also result in public and private investments getting crowded out.

“Even as we expect the Reserve Bank to cut rates by another 25-50 basis points in FY17, the space for further monetary easing to support growth is likely to get constrained,” Macquarie said.

To achieve medium-term fiscal consolidation objectives, the government should focus on cutting unproductive expenditure, improve tax administration and pursue structural reforms like the Goods and Services Tax, Macquarie added.