India Economic Survey 2017: FM may likely stick to fiscal consolidation path in Budget 2017

Moneycontrol BureauThe Economic Survey 2017’s remarks on fiscal policy indicates that Finance Minister Arun Jaitley may stick to the fiscal consolidation roadmap in his Budget due tomorrow.The fiscal deficit target for FY18 is 3 percent of GDP, but most economists are expecting Jaitley to set a target anywhere between 3.0-3.5 percent, as the government looks to revive demand in the wake of demonetization.“India’s experience has reaffirmed the need for rules to contain fiscal deficits, because of the proclivity to spend during booms and undertake stimulus during downturns,” the Survey notes.“India’s experience has also highlighted the danger of relying on rapid growth ather than steady and gradual fiscal and primary balance adjustment to do the “heavy lifting” on debt reduction.In, short it has underscored the fundamental validity of the fiscal policy principles set out in the FRBM (Fiscal Responsibility Budget Management),” the Survey notes.The Survey said that the approach by some of the advance countries to take on a higher fiscal deficit to boost economic growth was not relevant for India.At the same time, the Survey has also opened a small window for a likely relaxation in the fiscal deficit target.“Even as the basic tenets of the FRBM remain valid, the operational framework designed in 2003 will need to be modified for the fiscal policy direction of India of today, and even more importantly the India of tomorrow,” the Survey says.In its Budget preview note, brokerage house Edelweiss says that the government should relax its fiscal deficit target.“Economy is facing shortfall of aggregate demand with private sector spending very weak, credit growth is at multi-decade low, external demand is unusually weak and Terms-of-Trade (ToT) windfall is now receding. We think the government should target fiscal deficit of 3.5 percent of GDP in FY18, instead of targeting the 3 percent FRBM target,” says the Edelweiss report.Economists at Morgan Stanley feel the government will not use fiscal stimulus as a means to revive domestic demand, as it has limited fiscal space. “We expect a continued focus on fiscal consolidation (mainly via controlling expenditure growth) and that policy makers will continue to use off-budget spending and measures to boost public capex,” the Morgan Stanley note says, adding “..we expect the central government fiscal deficit to be reduced to 3.3 percent of GDP in FY18 as compared to 3.5 percent of GDP in FY17.”