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Informist, Friday, Jan. 10, 2025

 

--Lekha Chakraborty: Need fiscal deficit at 4.5% for few yrs to aid growth

--CONTEXT: Comments by NIPFP's Lekha Chakraborty in interview with Informist

--Lekha Chakraborty:Aggressive sub-4.5% fiscal deficit target to hurt growth

--Lekha Chakraborty:Can't afford further fiscal deficit reduction below 4.5%

 

 

By Priyasmita Dutta

 

 

NEW DELHI – The Indian government needs to keep the fiscal deficit at 4.5% of GDP for a few years beyond 2025-26 (Apr-Mar) to ensure growth is supported, according to Lekha Chakraborty, professor at the National Institute of Public Finance and Policy, warning that the Indian economy "cannot afford" further reduction in the deficit.

 

"Fiscal policy needs to be accommodative for growth," Chakraborty told Informist in an e-mail interview ahead of the presentation of the Union Budget for FY26 on Feb. 1. "Fiscal discipline through phasing out revenue deficit cannot be even thought of right now. Though phasing out of revenue deficit is termed as 'golden fiscal rule', given the macroeconomic uncertainties, it cannot be golden. Keeping fiscal deficit at 4.5% for next few years can be good for growth. Any aggressive target below 4.5% will affect growth."

 

As per the government's medium-term roadmap, the fiscal deficit must be reduced to below 4.5% by FY26. While it was initially expected that the deficit-reduction trajectory will return to the mandated 3.0%, Finance Minister Nirmala Sitharaman had said in her FY25 Budget speech that the government will now shift its focus on reducing the debt-to-GDP ratio.

 

Chakraborty acknowledged the uncertainty around the new direction of Indian fiscal policy but said she preferred reducing the debt-to-GDP ratio while keeping the fiscal deficit constant at 4.5% of GDP. "We cannot afford that (further fiscal deficit reduction) given the geopolitical risks and macroeconomic uncertainties," she said.

 

The Centre is well on track to reduce its fiscal deficit to 4.9% in FY25, which had shot up to 9.2% in FY21 due to the coronavirus pandemic. As per GDP data, growth in Government Final Consumption Expenditure is seen edging up to 4.1% in FY25 from a mere 2.5% in FY25.

 

NEED FOR GROWTH

The looming change in the government's fiscal rules coincides with a sharp slowdown in activity levels, with India's GDP growth slumping to a seven-quarter low of 5.4% in Jul-Sept and a four-year low of 6.4% in FY25, as per the statistics ministry's first advance estimate. While the government has termed the quarterly slowdown as a one-off, Chakraborty thinks certain sectors could be permanently scarred and may require structural reforms for a sustained recovery.

 

"So the focus is on next budget--to understand the fiscal policy imperatives for the recovery in growth," she said.

 

Concerns have also mounted over weakness in consumption levels, with several businesses cautioning in recent months that demand from India's middle class is falling, with premium segments instead driving the aggregate figure. This has led to calls for measures, such as cuts in income tax rates, to boost consumption. According to Chakraborty, there is "no quick fix": "If the propensity to save among people is higher, increased income in the hands of people cannot stimulate demand."

 

Higher prices have also hurt discretionary spending, with the latest Household Consumption Expenditure Survey showing that Indians spent a greater portion of their monthly consumption expenditure on food items in 2023-24 (Aug-Jul) compared to the previous 12 months. But while high food inflation has kept the headline figure elevated and stopped the Reserve Bank of India's Monetary Policy Committee from easing financial conditions, "reducing interest rate by RBI cannot revive growth", Chakraborty said.

 

MORE CAPEX AHEAD?

As part of its effort to improve the quality of its spending, the government has pushed hard on capital expenditure to boost India's growth in the post-pandemic era. While this has led to the Centre spending record sums on investments every year--it plans to spend INR 11.11 trillion on the same in FY25--the results are not crystal clear.

 

"The lagged effects of the government's capex spending are real. There is no crowding out at least, in the sense, there is no 'direct' crowding out or 'financial crowding out'. Direct crowding out occurs when increase in public investment displaces private investment. As the increase in public investment is predominantly on infrastructure, it will 'crowd in' private investment. However, the geopolitical risks and uncertainties are affecting the private investment decisions," Chakraborty said.

 

The current financial year has also seen the government struggling to invest, with capex in the first two-thirds of the year at less than half the full-year target. But that is unlikely to deter the government in the upcoming Budget.

 

"...public infrastructure investment is crucial to boost growth. Centre's sustained focus on infrastructure is welcome. The capex transfers from centre to states for infrastructure investment need to be continued in this budget as well. It has multiplier effects," Chakraborty said.  End

 

Edited by Akul Nishant Akhoury

 

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