Monday , October 23 2017

India pledges to meet budget deficit, but fiscal outlook clouded

epa06007813 An Indian farmer transports his harvested paddy on a buffalo cart near the Mayong village in the Morigaon district of the Assam state, India, 03 June 2017. The Food and Agriculture Organization of the United Nations (FAO) in one of their statistics said that the latest official estimate puts the 2016 Kharif rice production at 93.9 million tonnes (milled basis), three percent above the reduced level of 2015 and a record high.  EPA/STR

Bloomberg

India warned that fiscal slippages could be a drag on Asia’s third-largest economy in the year to March 2018, but pledged to meet its budget deficit targets as it sought to reassure investors and global rating companies.
The mid-year survey of the economy released by Prime Minister Narendra Modi’s chief
economic adviser, Arvind Subramanian, also called for interest rates to be lowered even further as India struggles with subdued private sector investment and a banking sector grappling with rising non-performing assets.
It cautioned that “anxiety reigns because a series of deflationary impulses are weighing on an economy yet to gather its full momentum.” These include stressed revenues from the agricultural sector, farm loan waivers and declining profitability in the power and telecommunication sectors.
But it also pointed to optimism generated by structural reforms such as the introduction of
the goods and services tax and the decision to privatise Air India. There is “growing confidence that macro-economic stability has become entrenched,” the survey said.
“The economic survey is making the right noises in many places while at the same time it raises issues of fiscal uncertainty based on growth uncertainty,” said N.R. Bhanumurthy, Delhi-based economist at the National Institute of Public Finance. “Demonetisation and GST implementation have caused structural changes in the economy,” he said, noting the central bank was “taking a more calibrated view on inflation.”
The central bank cut rates earlier this month to its lowest in seven years to boost the economy amid record low inflation. The central bank said it was paying a dividend of $4.6 billion to the government putting New Delhi under pressure to achieve its budget targets through higher asset sales or cuts in subsidies.
India’s budget shortfall is forecast to be 3.2 percent of gross domestic product in the year to March 2018. While that would be smaller than the previous year’s 3.5 percent, it’s wider than the target of 3 percent. The government intends to hit that target next year, the economic survey said.
The federal government has slowly brought the gap down from 5 percent of GDP a few years ago. But the deficits are actually widening at the state level — leaving India’s financial position essentially unchanged from 2012, before Modi took power. HSBC Holdings Plc forecasts the combined deficits of Indian states increased to 2.8 percent of gross domestic product in the year that ended in March 2017 from 2 percent during 2011 to 2014.
The problem is likely to get worse as populist farm loan waivers and other spending sprees pick up ahead of the general election in 2019.

Still Recovering
The $2 trillion economy is still recovering from Modi’s unprecedented cash ban imposed late last year. And while the introduction of the goods and services tax in early July went off smoothly, there are indications that India’s vast shadow economy—which makes up for an estimated half of the country’s GDP —has been hurt by both the cash ban as well as the introduction of the sales tax.
Add to that underlying slack at factories, rising job losses and anemic loan growth could slow expansion before Modi faces re-election in 2019. His government has limited room to increase spending because it runs a bloated budget deficit, and room for monetary easing may close when the Federal Reserve starts reducing its balance sheet later this year.
Surveys from the Reserve Bank of India showed Indian factories were running at about 74 percent of capacity October-December, business sentiment in Indian manufacturing worsened April-June, consumer confidence dipped into the “pessimistic zone” in June.

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