By Devika Panse
India’s fiscal deficit may widen further to 3.5 percent of gross domestic product in FY19 after breaching the target this year, since the government may go for fiscal easing and increase its spending in the run-up to the 2019 general election, said Morgan Stanley in a note.
What is fiscal deficit?
In simplest terms, fiscal deficit is the difference between expenditure and income of the government. If the expenditure exceeds the revenue, we experience a fiscal deficit; and if the income exceeds the expenditure, we have a fiscal surplus. Money earned from borrowings, however, is not considered as income in this scenario.
India’s fiscal deficit till the end of November had already breached the target and touched 112 percent of the budget estimate for 2017-18 due to higher expenditure.
Predictions by Morgan Stanley and Deutsche Bank
Citing its forecasts for the coming year, Deutsche Bank expects the government to curtail it at 3 percent to avoid the risk of inflation and the Reserve Bank of India shifting its stance to hiking rates, which may impact economic recovery.
Morgan Stanley, however, believes that expansionary fiscal policy next year could be more on the capital expenditure and for individuals, it would be more direct transfers and would be mostly inflation neutral.
The Deutsche Bank note said that damage to growth recovery on account of potential rate hikes outweighs the benefits of a slightly expansionary fiscal policy.
“The overarching issue that investors are watching for is the extent of divergence from the planned fiscal consolidation path, or more specifically, whether policymakers will be increasing the spending in the form of transfers to households, which would have an impact on the macro stability,” Morgan Stanley said Monday.
“While we do expect expenditure growth to accelerate in FY19, the expenditure mix would still be skewed towards capital expenditure, which will limit the spillover impact to inflation,” Morgan Stanley said.
Both the foreign brokerages expect fiscal deficit at 3.4 percent in FY18, against the budgeted 3.2 percent.
Debate on fiscal policy
In latter 2017, India’s economy has entered into a period where consumption and exports are recovering simultaneously, suggesting that the economy is working off the impact of GST and the currency replacement program.
The much-anticipated debate is about whether the fiscal deficit would comply with the pre-planned numbers, or whether there would be a considerable divergence in the trend. On the backdrop of the slow growth in FY18 and speculative pre-election spending, the fiscal deficit numbers are likely to be higher than expected, once again. A rise in fiscal deficit also raises concerns about rising inflation numbers in near future.
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