Economic Survey 2015: Government needs to work to rein in fiscal deficit at 3% of GDP in the medium term

India needs to keep a tight leash on its expenditure and direct it towards public investment to achieve "rapid, sustainable and all-encompassing" growth, even as the country can slightly loosen the purse strings in the immediate future, the Economic Survey tabled in Parliament on Friday said.

The survey has made a case for some fiscal room in the coming year while underlining that the country cannot afford to be complacent and needs to work to rein in fiscal deficit at 3% of GDP in the medium term. The survey also made it clear that the gains on account of reduction in subsidy outgo and higher divestment proceeds should be directed towards public investment.
"In the upcoming year, the pressures for accelerated fiscal consolidation have lessened because macroeconomic pressures have significantly abated," the survey, authored by chief economic advisor Arvind Subramanian, said. The government is looking to reduce fiscal deficit to 4.1% of GDP in the current financial year, a target that the survey asserted will be achieved.

As per the medium-term fiscal framework, the government has to bring down fiscal deficit to 3.6% of GDP in 2015-16 and to 3% of GDP in 2016-17. Implementation of 14th Finance Commission recommendations that have led to higher devolution to states, provision for compensation for reduction in central sales tax and higher capital spending have made the task of achieving 3.6% target in 2015-16 tougher.

The survey sees improvement in government's finances going forward after the introduction of goods and services tax, revenue buoyancy and reduction in some expenditures that could help the government meet the stiff target of containing fiscal deficit at 3% of GDP in 2016-17 without deviating from the FRBM (Fiscal Responsibility and Budget Management) Act. Economists say the survey has pitched for some fiscal headroom in the coming year.

"He is making a direct case for some fiscal headroom in the short run," said Abheek Barua, chief economist at HDFC Bank. "The difference between 3.9% and 3.6% is minuscule," he added. Citi too expects the government to stay disciplined in its spending. "We expect the government to adhere to its fiscal consolidation path (fiscal deficit at 3.6%-3.8% of GDP in FY16)," Citi said in a note.

Several economists have in the run-up to the budget pitched for pressing the pause button on fiscal consolidation to boost public spending to lift growth. However, the YV Reddy-headed 14th Finance Commission has recommended that the government adhere to the fiscal consolidation plan by reducing fiscal deficit to 3% of GDP by 2016-17. The government will reveal its chosen path on Saturday, when Finance Minister Arun Jaitley presents his first full budget.