India’s fiscal deficit is likely to reduce to 3.7 per cent of GDP by financial year 2018 and the consolidation process would be gradual, says a Deutsche Bank report.
According to the global financial services firm, in the path of fiscal consolidation, the easy part is done while the hard work is ahead.
“It will be an uphill task to reduce the headline fiscal deficit to 3 per cent of GDP by FY18, unless such consolidation is supported by a strong pick-up in revenue, particularly tax revenue,” the report said.
“We are forecasting fiscal deficit for FY17 to be 3.8 per cent of GDP, improving modestly thereafter to 3.7 per cent of GDP in FY18”, it added.
The report noted that in order to achieve the medium term goal, the authorities would need to push fiscal deficit down to 3.5 per cent of GDP in the next fiscal year (FY17), which “we think would be challenging given the sluggish economic recovery”.
“In order to achieve sustainable fiscal consolidation, the authorities would have to take far reaching and politically challenging revenue and spending reforms, the report said, adding that “they (the authorities) are barely at the early stages of this daunting journey”.
Though two major thrusts like fuel subsidy reduction and capital expenditure compression have driven fiscal consolidation in recent years, hardly any progress has been made in improving revenue collection.
Moreover, very little work has been done to improve revenue figures by taking additional measures and improving compliance and implementation of the much discussed Goods and Services Tax.
As per Deutsche Bank, the practice of using disinvestment proceeds to lower deficit financing is “unsustainable”.
The report said fiscal consolidation challenges will also mount if economic growth fails to recover while real rates are kept relatively high by RBI to attain its inflation target.
A key near term risk to spending (and inflation) is the forthcoming 2016 Pay Commission measure that could boost the wage bill by an additional 0.8 per cent of GDP.