Eye on deficit, Finance Minister Arun Jaitley may not loosen purse strings - Economic Times

NEW DELHI: The finance ministry has pitched for keeping up the pressure on fiscal consolidation even as some leading economists have urged the government to adopt a longer time frame to improve its finances as a way of giving a push to the struggling economy that's slumped to decadal lows.

Ministry officials have argued that any relaxation in attempts to narrow the fiscal deficit will send the wrong signal to investors and derail the fight against inflation. Rupee's rise and restructuring of some central schemes are expected to provide much-needed fiscal space for a capital spending boost, officials have argued. Currency strengthening will help cut fertiliser and fuel subsidies.

The final decision will be taken by Finance Minister Arun Jaitley and Prime Minister Narendra Modi.

Panagariya OK with 4.7% Fiscal Deficit

"Any letup in fiscal consolidation does not make any sense as it will have implications for the rupee as also inflation... We will push for continuing fiscal consolidation," a finance ministry official said.

Former finance minister P Chidambaram's road map pegged the fiscal deficit at 4.1% of GDP in FY15, compared with 4.5% achieved last fiscal against the budgeted 4.8%.

The sharp expenditure compression by the government has, however, meant growth barely hastened in FY14 to 4.7%, the second consecutive year of sub-5% growth in an economy battered by weak consumer and investment demand. Leading economist and Columbia University professor Arvind Panagariya — who was involved with BJP's economic thinking in the run-up to the elections and is widely expected to get an advisory role in the new government — has pressed for a higher fiscal deficit to boost capital spending.

"In an economy where you are trying to push up the growth rate, a fiscal deficit of 4.5% (of GDP) is fine," Panagariya has said. But officials said any wavering on fiscal consolidation will send the wrong sort of message to currency and stock markets. A stronger currency can help fight inflation and reduce subsidies, which together will create room for policy-makers to think of stimulus measures, officials said. India's fiscal deficit will be positively impacted by 20-30 basis points, all else remaining unchanged, Swiss Bank UBS said in a note.

Over 30% of the wholesale price indexbased inflation can be classified as "imported inflation", such as that related to fuel, fertilisers, metals and machinery, UBS said, citing an RBI study.

Rupee appreciation has already lowered losses on diesel sales to Rs 2.80 per litre and the 50 paise by which the price is increased every month should help the government wipe out the subsidy completely in the next few months.

A lower subsidy bill can provide room for more expenditure even as the fiscal road map prepared by Chidambaram, which projected the fiscal deficit at 3% by FY17, is adopted by the new government, officials said.

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