Expenditure Quality Key for Fiscal Consolidation - India Ratings

New Delhi, February 27, 2015: India Ratings & Research (Ind-Ra) believes the growth and inflation targets proposed in The Economic Survey 2014-15 are achievable and expects the finance minister to use them in formulating FY16 budget. The survey urges the government to focus on expenditure control to rein in fiscal and revenue deficit. For this to come true, the quality of expenditure must improve and subsidies must get rationalised. 

 

The survey expects Indian economy (gross domestic product (GDP) at market prices) to grow by 8.1%-8.5% in FY16 (FY15 advance estimates (AE): 7.4%). The survey also expects Consumer Price Index (CPI) based inflation to average between 5% and 5.5% and GDP deflator to grow by 2.8%-3.0% in FY16, translating into a nominal GDP growth of 11.1%-11.8% (FY15 (AE): 11.5%). The survey says low inflation will pave the way for further monetary easing. This is consistent with Ind-Ra’s assessment of 75bp monetary easing in FY16. 

 

The Economic Survey 2014-15 revolves around two key themes - creating economic opportunity and reducing vulnerability. The survey says that this is the right time to aim at double-digit, medium-term growth because fortune and facts appear to be aligned in favour of India. In view of a clear political mandate, it calls for decisive economic reforms which are persistent and encompassing. The survey acknowledges that this is a daunting task but indicates it is possible due to the strong political mandate for economic change. 

 

The survey opines that due to stressed corporate and banking balance sheet and deficient public-private partnership model, there could be a delay in the revival of private investment in the short-to-medium term. However, in the long run, private investment must become the main engine of growth. While the investment climate improves, the public investment, especially by the railways should provide support. 

 

The survey also calls for reforms to boost investment and growth and stresses for exemption-light tax policy regime. Apart from goods and services tax, the tax policy should lower the cost of capital, increase savings and facilitate tax payers. The survey recommends the usage of technology along with Aadhar and Jan Dhan for direct benefit transfer. It expects the JAM Number Trinity – Jan Dhan Yojana, Aadhaar and Mobile numbers— to be a game changer because it expands the set of welfare and anti-poverty policies that the state can implement in future. 

(Source: Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company)