Economy slowdown: FM raises concerns, may relax fiscal deficit target

The government is considering a plan to loosen its fiscal deficit target to enable it to spend up to USD 7.7 billion more to halt an economic slowdown. With the extra money, the government eyes to spend more on bank recapitalisations, rural jobs programme and rural housing.

Indian economy slowed to a three-year low of 5.7 percent in the quarter that ended in June. Finance Minister Arun Jaitley said on Wednesday that the government was looking for ways to speed it up. The extra spending was estimated to widen the federal fiscal deficit for the financial year ending next March to 3.7 percent of GDP from a budgeted target of 3.2 percent.

The government is mulling on measures to strengthen bank balance sheets by recapitalizing public sector undertaking (PSU) banks. The government had in the Budget outlined a provision of Rs 10,000 crore for recapitalisation of banks in FY18. It is considering a plan to loosen its fiscal deficit target to enable it to spend up to USD 7.7 billion more to halt an economic slowdown, two government officials said on Thursday.

The bank recapitalisation could be either done by filling the bank coffers with RBI reserves or by issuing recap bonds which are not the government of India bonds and do not add up to the fiscal deficit. The banks buy those bonds and the money made from it is put back into the public sector banks.

Disclosing that Finance Minister Arun Jaitley has held a series of meetings with different ministerial secretaries and economists, he said, "Some recent data raises certain concerns and a lot of it has to do with the capacity of the banks, particularly PSBs, and therefore we are in the process of discussion and very shortly whatever is required to be done in order to improve the environment in terms of policy, we'll certainly react to it."

Last November, Prime Minister Narendra Modi’s decision to scrap the old bank notes wiped out about 86 percent of currency in circulation thereby hurting consumer demand.

Also, the farm loan waiver announced by three states including Uttar Pradesh, Maharashta and Punjab amounts to around Rs 77,000 crore which is 0.5 percent of the GDP.