31/01/2017
“Topic in Trend” – Budget Series Part 3: Budget and its likely impact on FY18 GDP growth.
As per market sentiments and researchers view the Union government is likely to stick to its self-imposed fiscal deficit target of 3% of GDP for FY18. In case, the government decides to pass on the entire pool of additional resources (collected due to a wider individual tax base) to the general public, it will not add much to FY18 GDP growth.
However, there could be some boost to GDP growth in subsequent years to the extent that these additional resources are spent on capital account rather than redistributing to the general public as tax breaks (or spending on revenue account).
Also the fiscal stimulus associated with expansion in fiscal deficit does not add anything to GDP growth during that year, unless new borrowings are financed by the monetary authority (or foreigners, to some extent). Under the current economic scenario in India, higher deficit makes sense only if the government decides to spend all additional resources on capital account, which is not an easy task.
Impact & Understanding:
-- Demonetization is likely to bring in additional resources to the government with more individuals coming under the tax net. These additional resources are most likely to be redistributed among honest tax payers by cutting individual income tax rates or reducing corporate tax rate and other domestic entities (by increasing it’s spending), leaving only a small portion for the capital spending.
--Such redistribution may not have any substantial impact on GDP growth for FY18 or any subsequent year. If the government has to stimulate the economy and increase borrowings (or fiscal deficit), it must focus on spending on infrastructure rather than revenue account.
--Also if government expands its fiscal deficit and decides to finance it through market borrowings, then new government papers are bought by any domestic entity other than the monetary authority, it would not have any positive impact on demand of domestically produced goods & services in the economy.
--Higher fiscal deficit leads to incrementally higher demand of goods & services if and only if the new borrowing is financed by either the monetary authority or by foreign entities (to some extent).
Regards
Nainesh Sanghani
M: 9892249356
