Economic Survey 2018: Pause in general fiscal consolidation cannot be ruled out

The government had pegged the fiscal deficit target at 3.2 percent of Gross Domestic Product (GDP) for the financial year 2017-18, ensuring adherence to the path of fiscal consolidation, without compromising on public investment. It aims to achieve a target of 3 percent in 2018-19.

The early pick-up in expenditure coupled with front-loading of some expenditure and increased interest outgo exerted pressure on fiscal deficit, which expanded to 112 percent of budget estimates by November 2017.

Uncertainty in indirect tax collection due to the rollout of Goods and Services Tax (GST), receiving reduced divided from the central bank and lesser revenue from telecom spectrum led to overshooting the budgetary target.

Similarly, expenditure also progressed at a fast pace, reflecting the advancing of the budget cycle by a month which gave considerable leeway to the spending agencies to plan in advance and start implementation early in the financial year.

As a result, the government’s fiscal deficit until November was Rs 6.1 lakh crore compared to the budgeted Rs 5.5 lakh crore.

“In addition, the measured deficit for 2017-18 will include Rs 80,000 crore (0.5 percent of GDP) in capital provided to public sector banks. But this will not affect aggregate demand, as reflected in international accounting practice which deems such operations as financing (“below-the-line”) rather than expenditure,” the survey said.

However, state governments seem to move closer to their targeted fiscal consolidation--in part because the Centre has guaranteed them a large increase in their indirect tax take via compensation cess, as a part of the GST law.