Uncertain Fiscal Outlook to Undermine India’s Growth Hopes

There seems to be trouble brewing for Asia’s third biggest economy as fiscal slippages could be a drag on the country in the year to March 2018, with outlook for current financial year turning more somber.

According to Economic Survey Part-II released, the country is facing an uncertain fiscal outlook going forward and this would make it difficult in achieving higher end of the 6.75-7.5 per cent GDP growth estimated earlier.

The downside risks to growth and fiscal outlook of the Indian economy are piling up in the form of deflationary impulses like farm loan waivers, stressed farm revenues, as non-cereal food prices have declined and declining profitability in the power and telecommunication sectors, further worsening the Twin Balance Sheet (TBS) problem. However, it remains upbeat on meeting the fiscal deficit target, according to the second part of Economic Survey.

The twin balance sheet problem refers to the ballooning of debt on the books of corporate entities and the estimated Rs10 trillion of stressed assets that have piled up at banks because of the inability of borrowers to repay.

Owing to the gradual fiscal consolidation path chalked out in Union Budget for 2017-18, the fiscal deficit is expected to come down to 3.2 per cent of GDP during 2017-2018. After reaching this milestone, the fiscal deficit target of 3 per cent of GDP under the FRBM framework is likely to be achieved in 2018-19.

The mid-year survey also called for interest rates to be lowered even further as India struggles with subdued private sector investment and a banking sector coping with rising non-performing assets. 

Moving ahead, the government needs to convince the central bank to slash rates further, by pushing policy measures to keep inflation under control. With inflation dipping to 1.5 per cent in June, weak demand has been a serious concern. According to the repot, inflation is projected to remain below the medium-term target of 4 per cent.

Latin Manharlal Group