Some states pitch for relaxation in fiscal deficit target to 4% to boost consumption

With tax revenue slowing in a sputtering economy, some states on Wednesday suggested Finance Minister Nirmala Sitharaman to go for fiscal expansion and relax the deficit target to 4 percent of the GDP. The finance minister in her July Budget reduced the fiscal deficit target to 3.3 percent from an earlier 3.4 percent for 2019-20. Keeping in mind its fiscal deficit target, the government has stayed with the borrowing plan for the fiscal as announced in the budget despite a sharp cut in the corporate tax rate that is expected to cost Rs 1.45 lakh crore.

During the pre-budget consultation with Union Finance Minister, some states made a case for fiscal expansion by boosting consumption to tide over the sluggishness in the economy. "The biggest take-home from Pre- Budget discussion of FMs is a suggestion by Bihar and Kerala to raise the fiscal deficit limit to 4 percent. It was agreed to a large number of states. In current year real expenditure of states will decline- a crazy macro outcome in time of recession," Kerala Finance Minister Thomas Isaac said in a tweet after pre-budget meeting here.

Some experts have already predicted that the fiscal deficit is expected to rise to 3.6-3.8 percent of the GDP during the current fiscal due to weak revenue collections resulting from sluggish economic growth and government's sweeping corporate tax rate cut. The country's fiscal deficit hit 102.4 percent of 2019-20 Budget Estimate at Rs 7.2 lakh crore at the end of October. The fiscal deficit or the gap between expenditure and revenue was at Rs 7,20,445 crore as on October 31, 2019.

Many economists, including former RBI Governor Raghuram Rajan, have expressed fear of India getting into a slow growth high inflation or stagflation mode. Rising food prices pushed retail inflation in November to an over three-year high of 5.54 percent, while industrial sector output shrank for the third month in a row by 3.8 percent in October, indicating a deepening slowdown in the economy.

India's economic growth slowed to a 6-year low of 4.5 percent in the July-September quarter. With inflation rising, fears of stagflation -- a fall in aggregate demand accompanied by rising inflation -- have resurfaced.