India Favors Subsidy Cuts to Expand Fiscal Room

(Bloomberg) --

The top economic adviser to India’s government favors relaxing the budget deficit target to boost economic growth from an 11-year low.

Considering the urgent priority of the government to revive growth in the economy, the fiscal deficit target may have to be relaxed for the current year, according to the Economic Survey -- an annual report card on the economy -- tabled in Parliament by Finance Minister Nirmala Sitharaman Friday. The report is authored by the ministry’s Chief Economic Adviser Krishnamurthy Subramanian.

India Budget Seen as Modi’s Key Test to Revive Growth (Podcast)

India’s fiscal deficit is seen slipping to 3.8% of gross domestic product in the year to March, against a budgeted 3.3%, as the slowdown lowered revenue collections and the government provided a tax stimulus to spur investments.

Cutting the food subsidy can help provide more fiscal room, according to the survey.

The government distributes food grains at below market prices to keep costs low. It had budgeted 1.84 trillion rupees ($26 billion) for food subsidies in the year to March, making up more than half of the nation’s 3 trillion-rupee subsidy bill.

“The government must use its strong mandate to deliver expeditiously on reforms, which will enable the economy to strongly rebound in 2020-21,” Subramanian wrote in the survey.

Sitharaman is scheduled to present the annual budget on Saturday, and is expected to outline measures to boost consumption in Asia’s third-largest economy, which is set to expand 5% in the fiscal year through March, the weakest pace since 2009.​

Read Our Budget Guide: India Braces for Deficit Blowout, Higher Borrowing

​Growth may accelerate to 6%-6.5% in the coming fiscal year because of favorable base effects, according to the document.

The survey highlighted muted indirect tax collections in the first eight months of the current financial year, and underlined the need for revenue buoyancy of the newly-introduced goods and services tax to support the government’s finances going ahead.

The government has already cut spending limits available to ministries and departments amid the crunch in revenue.

Reducing subsidies may also help. The food subsidy bill exceeds the $24 billion windfall the government received in the current financial year from the central bank, which pays dividends to the Finance Ministry every year.

©2020 Bloomberg L.P.