By Anshia Dutta
Finance Minister Arun Jaitley mentioned that he would set a fiscal target of 3.3% of India’s GDP during his presentation of the annual budget 2018-19. On the 15th of February, the International Monetary Fund welcomed this target and declared that it was optimistic that the country would return to the path of fiscal consolidation.
Fiscal deficit trend in recent years
The fiscal deficit is an indicator of the financial health of the nation. It is the excess the government spends over and above its revenue, excluding any borrowing. It is usually expressed as a percentage of the nation’s gross domestic product (GDP).
India’s fiscal deficit has been averaging 3.86% of GDP from 1991 to 2016, ranging from 2.04% of GDP in 1997 to 7.08% of GDP in 2009. Post-2012, the fiscal deficit has fallen every year in absolute terms, with the deficit remaining at 3.5% for both 2016 and 2017.
The IMF’s view on the deficit target
On the 15th of February, the International Monetary Fund welcomed the announcement of India’s new fiscal deficit target of 3.3% of GDP and noted that the country is slowly but surely returning to the path of fiscal consolidation. William Murray, Deputy Spokesman of IMF said, “We really haven’t had a chance to fully assess it. But, that said, we welcome the fiscal 2019 budget targets, which has a fiscal deficit of 3.3% of GDP which in our view returns the budget to a path of gradual fiscal consolidation while keeping in mind the need to provide support to India’s needs and economic recovery.”
Gerry Rice, the Director of the IMF’s Communications Department, said that setting a fiscal deficit target of 3.3%, which is lower than the previous financial year’s target of 3.5%, is what the IMF had been recommending. He added, “We think the budget assumes the tax revenue will rise faster than the value of transactions in the economy, so it’s ambitious, as it assumes the government will be able to collect higher tax revenue from the same amount of consumption and income.”
The IMF projected a growth rate of 7.4% in India’s GDP for 2018 and 7.8% for 2019 in its World Economic Outlook update released in Davos, Switzerland. Murray said, “We take note of considerable progress made on both the pace and composition of reforms being implemented in India in recent years in line with our recommendations.” The reforms include the recapitalisation of the public sector banks, relaxing foreign direct investment norms, and the implementation of the GST and Insolvency and Bankruptcy Code (IBC).
Potential pitfalls
The IMF is also looking at potential pitfalls in terms of a decline in revenue. In particular, there have been certain implementation issues with the GST and the persistence of these could result in a fall in tax revenue. On the other hand, the finance minister stressed new initiatives like rural health, social welfare, a minimum support price of 1.5 times the cost of production for farmers, and a national healthcare scheme of half a million annually which will cover 500 million beneficiaries. However, expenditure on these policy initiatives could result in a decline in capital expenditure which may jeopardise growth in the medium-term.
Featured Image Source: Flickr
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