New Delhi: The Indian economy is in urgent need of a fiscal push now to shore up growth, said a report of SBI Economic Research on Tuesday. It warned against any spending cuts in current situation by the government to meet fiscal deficit target as growth, which is already weak will suffer.
“The need of the hour: Spend more to grow more,” said SBI Economic Research. It said the government should consciously expand the spending and fiscal deficit, without disturbing the borrowing maths.
According to the report, “The situation demands that the government steps in and uses the fiscal policy as a tool to rev up the economy.”
It pointed out that public administration sub-segment expanded by 9.5 per cent in first quarter driven by a 25 per cent jump in real government revenue expenditure net of interest payments. “This was also partially reflected in the jump in fiscal deficit to 92.4 per cent of the budgetary estimates for FY18 at July-end (Rs 5.05 lakh crore) as against 73.7 per cent in the corresponding period last fiscal. We are very much apprehensive that this might force the government to cut expenditures so as to meet its year end fiscal deficit target of 3.2 per cent,” said the SBI report.
On Monday, a report in news agency Reuters quoting finance ministry officials said that the government may cut its infrastructure spending due to a shortfall in revenue by Rs 80,000 crore on the account of GST.
The SBI report, however, warned that if the government slashes its spending, growth that is already weak will suffer further. “The question is can we afford to slip on growth again? We believe, with uncertainty regarding GST implementation and monetary policy support to growth not forthcoming, it will not be prudent on the part of the government to reduce spending as other growth drivers are missing,” said the SBI report.
“Any cutback in expenditure at this point will be majorly deflationary when private investment is unlikely to be forthcoming unless resolution starts happening in Q4FY18. Hence countercyclical fiscal policy is the need of the hour,” said SBI.
It said that the government can always use the clause in FRBM that says “far-reaching structural reforms in the economy with unanticipated fiscal implications” which can provide an escape clause for a 0.5 per cent deviation from there commended target. “Why not grab it now with structural reforms unleashed? Time is running out. Let’s not chase the rating upgrade mirage. Remem-ber India has had a solitary net rating upgrade in the last 25 years! Amu-sing, isn’t it?,” it added.
“Keynesian approaches suggest that fiscal policy should ideally be countercyclical, that is, fiscal deficits should decline when the economy is expanding and increase during economic downturns,” said the SBI report.
