Slow Growth Derails Government’s  Fiscal Calculations

December 25th, 2013- The sluggish Indian economy has not only taken a toll on tax collections but also created a mathematical problem for the Finance Minister as he looks to stay within the fiscal deficit target.

In his last budget, FM had pegged the fiscal deficit at Rs 5.42 lakh crore, or 4.8% of gross domestic product, and said that this is a "red line" that will not be breached. That deficit number assumes nominal GDP of Rs 113.7 lakh crore in 2013-14, a rise of 13.4% from Rs 100.3 lakh crore last year, something that looks too optimistic given the half-year numbers.

If the economy grows at the same rate as in the first half, other things being equal, FM will have to cut spending by an extra Rs 11,000 crore just to neutralise the slower pace of economic expansion.

Nominal GDP growth, which refers to national income at current prices as derived from market prices, was 10.6% in the first half of the year, according to data released by India's statistics office recently. If the country is to grow at the budgeted rate of 13.4% for the entire year, then second-half nominal growth would need to accelerate dramatically to nearly 16%, which looks difficult as of now. Meanwhile, the governments own fiscal consolidation effort will take a big chunk out of the economy as government  cuts spending to stay within the budgeted fiscal deficit.

In the second quarter, the community, social and personal services segment, which is largely government spending, rose only 12.4% in terms of current prices.

FM was able to bring the fiscal deficit under control last year after it threatened to slip. He slashed nearly Rs 82,000 crore from total government spending to deliver a fiscal deficit of 4.9% of GDP against a budgeted 5.1%, after at one point looking like it would to rise to 6%. But as a consequence, nominal GDP growth in the last financial year remained at 11.7% against the 14% budget estimate.

A similar expenditure control now could again effect national GDP to less than the budgeted 13.4%, which in turn will increase the spending cuts needed to achieve the fiscal deficit target of 4.8%. Instead of a fiscal deficit of Rs 5.42 lakh crore, the absolute amount would need to be closer to Rs 5.31 lakh crore under the new calculations. 

In a report released Crisil said it expects government to end the year with a fiscal deficit of 5.2% of GDP. Most other Private forecasts are also in the same range.


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