Arun Jaitley dumps Moody's, embraces growth, widens fiscal deficit target
ET Online|
Feb 01, 2018, 12.31 PM IST
The government has opted for wider fiscal deficit at 3.5 per cent of GDP for 2017-18 and projected 2018-19 deficit at 3.3 per cent of GDP. The government had aimed to contain the fiscal deficit for 2017-18 to 3.2 per cent of the GDP, and 3 per cent in 2018-19. The new fiscal deficit target can change the glide path set by the Fiscal Responsibility and Budget Management (FRBM) Committee.
The fiscal slippage will be closely watched by rating agencies. It will dent the credibility of the government which has committed itself to fiscal responsibility. It will also further harden bond yields and stoke inflation. It will negatively impact FDI inflow.
Growth pangs, rising oil prices and extra spending due to the various assembly elections this year and the Lok Sabha elections next year seem to have taken a toll on fiscal responsibility. The government had already exhausted 112 per cent of the fiscal deficit target for 2017-18 last year.
It was a moment of pride for the Narendra Modi government when Moody's Investor Service last year raised India's sovereign rating from the lowest investment grade of Baa3 to Baa2 and changed the outlook from stable to positive for the first time in nearly 14 years. The rating upgrade was seen as a seal of approval for the Modi government's fiscal management.
The Fiscal Responsibility and Budget Management (FRBM) Committee had recommended that the government should target a fiscal deficit of 3 per cent of the GDP in years up to March 31, 2020. It recommended fiscal deficit to be cut to 2.8 per cent in 2020-21 fiscal and to 2.5 per cent by FY 2023.
The panel, however, suggested "escape clause" in case of over-riding consideration of national security, acts of war, calamities of national proportion and collapse of agriculture severely affecting farm output and incomes.
Also, "far-reaching structural reforms in the economy with unanticipated fiscal implications" too can trigger deviation from the targets. "The deviations from the stipulated fiscal deficit target shall not exceed 0.5 percentage points in a year," it said.
The fiscal slippage will be closely watched by rating agencies. It will dent the credibility of the government which has committed itself to fiscal responsibility. It will also further harden bond yields and stoke inflation. It will negatively impact FDI inflow.
Growth pangs, rising oil prices and extra spending due to the various assembly elections this year and the Lok Sabha elections next year seem to have taken a toll on fiscal responsibility. The government had already exhausted 112 per cent of the fiscal deficit target for 2017-18 last year.
It was a moment of pride for the Narendra Modi government when Moody's Investor Service last year raised India's sovereign rating from the lowest investment grade of Baa3 to Baa2 and changed the outlook from stable to positive for the first time in nearly 14 years. The rating upgrade was seen as a seal of approval for the Modi government's fiscal management.
The Fiscal Responsibility and Budget Management (FRBM) Committee had recommended that the government should target a fiscal deficit of 3 per cent of the GDP in years up to March 31, 2020. It recommended fiscal deficit to be cut to 2.8 per cent in 2020-21 fiscal and to 2.5 per cent by FY 2023.
The panel, however, suggested "escape clause" in case of over-riding consideration of national security, acts of war, calamities of national proportion and collapse of agriculture severely affecting farm output and incomes.
Also, "far-reaching structural reforms in the economy with unanticipated fiscal implications" too can trigger deviation from the targets. "The deviations from the stipulated fiscal deficit target shall not exceed 0.5 percentage points in a year," it said.
