POST Online Media Lite Edition


India strikes balance between stimulating growth and fiscal discipline

Staff Writer |
India’s government held on to its fiscal consolidation goals and at the same time unveiled a budget designed to push growth into a higher gear in FY 2017.

Article continues below

The budget, which was presented by Finance Minister Arun Jaitley on 1 February, targets a smaller fiscal deficit of 3.2% of GDP from an estimated 3.5% of GDP in FY 2016.

The new fiscal roadmap also includes a number of growth measures, particularly focused on the rural economy and small to medium sized businesses.

Although the fiscal deficit target is slightly above an earlier promise of 3.0% of GDP, market reaction to the budget was positive as analysts praised broadly realistic revenue assumptions and lower-than-expected market borrowings.

These factors helped push the value of the rupee higher and the Indian stock market reacted positively in initial trading after the presentation.

Overall, the budget bodes positively for India’s macroeconomic stability and growth going forward.

Highlights from the budget include relief for the rural economy, especially farmers, who were hard hit by the government’s demonetization in November.

Funds allocated for rural development rose by nearly a quarter and measures to boost agricultural productivity and rural infrastructure where also included.

Fixing the country’s crumbling infrastructure was a key theme and funds will be allocated for upgrading roads, railways and other infrastructure.

Looking at the reforms, the government announced measures to move India towards a less cash-dependent economy and to increase transparency in political funding.

On top of these, the government abolished the Foreign Investment Promotion Board, which should improve the business climate and encourage foreign direct investment.

The planned deficit reduction will be achieved largely by keeping spending in check.

Total expenditure is projected to increase just under 7.0%—below the government’s assumption of nominal GDP growth of 11.8% and the estimated expenditure growth for FY 2016.

Notably, the government increased its allocation for capital expenditure by over 25% from the previous budget.

Regarding revenues, the budget details some minor changes to taxes including a cut in the corporate tax rate for small companies.

Earnings from disinvestment are projected to increase significantly from strategic stake sales and publicly listening insurance companies.

Market analysts have some doubts over specific projections in the budget, but as a whole the government’s targets appear achievable.

The budget bodes well for India’s outlook as the government prioritizes macroeconomic stability and focuses on economic reforms.

FocusEconomics Consensus Forecast panelists’ foresee a fiscal deficit of 3.3% of GDP for FY 2017, just a tad above the government’s projection of 3.2% of GDP.

What to read next

India takes down China as fastest growing economy
India registers 7.4 percent growth in July-September
For first time in 150 years, India's economy bigger than UK's