Need to shift to structural deficit instead of fiscal deficit: SBI economists

Mumbai: Slowdown in GDP expansion has economists at SBI Monday question the need to focus on fiscal deficit, and suggest a shift to "structural deficit" which will help the government accommodate growth needs.

The structural deficit is adopted by many advanced and also emerging markets, they said in a note.

"Given growth slowdown that India is facing, the question arises whether the government should continue to focus on fiscal consolidation path or keep the deficit numbers constant for the next two years before reducing it further and try to propel growth," they wrote, days after official figures suggested GDP growth fell to a five-year low of 5.8 percent for the January-March quarter FY2018-19.

"The alternative to targeting fiscal deficit is that like most advanced economies and several emerging market economies, India should target a structural deficit, which serves as an automatic counter cyclical stabiliser," it said.

Citing the example of the just concluded fiscal year 2018-19, it said the government had to cut down on expenditure of Rs 1.45 lakh crore in the face of a revenue shortfall of Rs 1.57 lakh crore, to meet the revised up target of keeping the fiscal deficit at 3.4 percent.

The dip in numbers puts the budget estimates for FY2019-20 in a quandary, it said, adding achieving the budget estimates for the new fiscal will involve a 29.5 percent increase in tax revenue growth and 21.9 percent revenue expenditure growth.

This will result in a revision in the estimates at the upcoming full budget on July 5, it said, pointing out that the fiscal deficit target is again set at 3.4 percent.

Given the increased growth concerns that the country is facing, GST regime and slowdown in direct taxes, the government should not pursue the path of "fiscal austerity", it said.

Although fiscal prudence is a necessary condition for maintaining macro stability, it is not sufficient, it added.

The note said one-off items like telecom revenues and other non-cyclical aspects are kept out while calculating the structural deficit, and going by IMF's methodology, the same comes at 6.3 percent for India.

"It looks even the IMF finds it difficult for consolidated deficit to decline meaningfully below 6 percent in the next couple of years. The question is therefore, do we keep it at current level of 6-6.5 percent, or go down the FRBM glide path to 5 percent?"

Meanwhile, Australian brokerage Jeffries said the government "juggled" to get the fiscal deficit at 3.4 percent of GDP but "a more daunting task awaits in FY20".

The next fiscal is difficult courtesy a Rs 1 trillion or 0.50 percent slippage likely even if GST collections rebound.