India is likely to pursue a mildly expansionary fiscal policy over the next 12 months largely due to the one off impact of government employee wage hike, says a report by Morgan Stanley.
Since financial year 2012-13, the government has been reducing the national fiscal deficit. On a consolidated basis, the fiscal deficit has reduced from 8.1 per cent of GDP in fiscal 2012 to 7 per cent in fiscal 2015-16.
"After being on the path of fiscal consolidation over the last four years, India is likely to pursue a mildly expansionary fiscal policy over the next 12 months because of a wage hike for government employees and an increase in off-budget capital expenditure," Morgan Stanley said in a research note.
The government has budgeted for around 60 per cent of the incremental expenditure on salaries, and thus there is a risk that if the government takes up full-scale implementation of the pay commission recommendation, it could compromise on the fiscal deficit reduction target, it added.
The central government has adopted a medium-term fiscal consolidation roadmap, targeting to reduce the central government fiscal deficit to 3 per cent of GDP by financial year 2017-18.
Morgan Stanley however, believe that the government will manage expenditure growth such that it does not risk overshooting the on-budget deficit target.
"While the government is likely to pursue a slightly expansionary fiscal policy in the fiscal year ending March 2017, we believe that it will likely get back on the path of neutral fiscal policy stance in fiscal 2017-18," the report said.
India's private debt levels are moderate and hence India does not face a major private sector deleveraging challenge like the developed economies. Moreover, the country's national fiscal deficit levels and public debt levels are at the higher end compared to the rest of the region.
