Jaitley's Big Dilemma: Cross the Fiscal Deficit Line or Not

Whether Finance Minister Arun Jaitley sticks to the fiscal roadmap, which mandates the government to narrow deficit to 3.6 per cent of GDP in 2015-16, is being widely debated ahead of the Budget. Some government advisors want Mr Jaitley to go soft on the fiscal roadmap as this will provide the government with more resources to boost spending on infrastructure to jump-start economic growth. Samir Arora, fund manager at Helios Capital, says that Mr Jaitley should stop worrying about fiscal deficit target. Government spending is needed to create assets because India's private sector is too leveraged to spend big on large infra projects, Mr Arora said. Others argue that the fiscal roadmap was set at a time when India was struggling not only with high fiscal deficit, but also high current account deficit. But now that India is no longer facing external vulnerabilities, the government should focus on jump-starting growth through money can come from reneging on deficit targets, analysts say. "The inherited fiscal targets of 3.6 per cent and 3 per cent of GDP for the next two years, respectively, come from a time when twin deficits and inflation were dangerously high. Since then the macroeconomy has improved meaningfully, twin deficits and inflation have fallen rapidly, foreign reserves have piled up and the rupee has stabilized. Against the backdrop of sluggish growth, some room for fiscal stimulus has opened up," HSBC Securities and Capital Markets said in a note. But many analysts warn that a breach of the fiscal deficit target could result in a downgrade for India's sovereign ratings. This will trigger a selloff in stock markets, which Mr Jaitley may not want. Foreign investors have been big investors in Indian stock and debt markets over the past one year, triggering a rally that saw the Sensex rally nearly 40 per cent during the period. The rupee has also remained steady in the 60-62 range against dollar over the past one year despite a lot of turmoil in many emerging market currencies. Higher deficits, the rating agencies have warned, would pressure India's credit rating, which is now just a notch above 'junk' status. Many foreign funds which track a country's sovereign rating withdraw their investments in the event of a rating downgrade. Abheek Barua, chief economist at HDFC Bank, said the fiscal deficit target is a sensitive issue for rating agencies which have warned that higher deficits would pressure India's credit rating, which is now just a notch above 'junk' status. Mr Barua argues that the finance minister has room to kick-start spending without largely breaching the fiscal deficit targets. This can be done if the government concentrates on "quality of spending" and find a way to attracting funds into infra projects. The public sector units can be asked to increase their spending and if government proceeds from avenues like divestment and spectrum auction are 'ring-fenced' for developmental spending, then Mr Jaitley can kick-start infra spending, Mr Barua argues. The finance minister has to address the finance needs of infra projects like attracting pension funds into road projects that don't need "spectacular returns but need steady returns", he said. To a degree, the fiscal deficit targets are being overplayed, says Mr Barua, who expects the finance minister to largely stick to the deficit goals. The management of funds by the government is key to watch, he added.

Jaitley's Big Dilemma: Cross the Fiscal Deficit Line or Not

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