Goldman, HSBC doubts on govt's fiscal correction map

Says Indian economy would not be able to meet earlier target of reining in the fiscal deficit to 3.5% of the country's GDP

Debate continues over the government's fiscal consolidation schedule, ahead of the Union Budget presentation on Febaruary 29.

While financial services companies Goldman Sachs and HSBC believe it would not be able to meet the earlier target of reining in the fiscal deficit to 3.5 per cent of the country's gross domestic product (GDP), Moody's Investors Service thinks it would.

"We expect the government to pause on fiscal consolidation and keep the central fiscal deficit unchanged at 3.9 per cent of GDP in FY17. We expect civil service wage increases to be implemented only partially, food subsidy allocations to rise, and capex to increase 25 per cent year-on-year," Goldman Sachs Economics Research said in a report.

In last year's Budget presentation, Finance Minister Arun Jaitley had delayed the consolidation road map by a year, saying he'd now bring down the deficit to 3.5 per cent of GDP in 2016-17 (from 3.9 per cent in 2015-16) and to three per cent in 2017-18.

Goldman Sachs said the key spending themes in the budget would be civil servants' wage increase, rural spending and greater capital spending. HSBC said Jaitley was likely to stretch the fiscal deficit target to 3.8 per cent of GDP for FY17, from the earlier commitment of 3.5 per cent.

"We believe the government, facing mounting spending pressure such as a higher wage bill, may choose to sign up for a wider deficit," its India Chief Economist Pranjul Bhandari said. She said that addressing the worries on growth was possible even if the government stuck to the 3.5 per cent target, warning that wider fiscal deficit numbers might hurt growth over a longer period, as the government's borrowing would edge out that of the private sector.

"The net impact on growth, although positive in the short term, could be uncertain over time, as a higher fiscal impulse could be met with some degree of crowding out," she said.

Adding: "A credible discussion on the quality of spending and the future path of consolidation will become critical, especially because the FY18 target of three per cent is even more challenging."

Moody's, said, "The pay increase will also probably raise inflationary pressures. However, we assume the government will cut spending in other parts of the budget to maintain the deficit broadly in line with the 3.5 per cent of GDP objective, thereby mitigating some of the inflationary effects."