India eyes extra spending to halt economic slowdown

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India’s government is considering a plan to loosen its fiscal deficit target to enable it to spend up to 500 billion rupees (7.7 billion US dollars) more to halt an economic slowdown, two government officials with direct knowledge of the plan said on Thursday.

Growth in Asia’s third-largest economy slowed to a three-year low of 5.7 percent in the quarter that ended in June, and Finance Minister Arun Jaitley said on Wednesday that the government was looking for ways to speed it up.

Arun Jaitley, India's finance minister, speaks during a Bloomberg Television interview at the Organisation for Economic Co-operation and Development (OECD) forum in Paris, France, on Wednesday. /VCG Photo

The officials, who declined to be named as the measures have not been made public yet, said the extra spending was estimated to widen the federal fiscal deficit for the financial year ending next March to 3.7 percent of GDP from a budgeted target of 3.2 percent.

“The fiscal deficit is not a sacrosanct number,” one of the officials told Reuters.

The official said that the economy was passing through a “transitory phase” after the government’s decision late last year to outlaw old high-value banknotes and after the launch of a nationwide goods and services tax in July.

Although growth was already slowing, Prime Minister Narendra Modi’s decision last November to scrap the old banknotes, in a bid to flush out money hidden from tax officials, wiped out about 86 percent of the currency in circulation almost overnight.

The decision hurt consumer demand in an economy where most people were paid and spent in cash, analysts said.

With the economy still reeling from the cash clampdown, the faulty implementation of the goods and services tax then made doing business far more complicated for many companies.

Jaitley has held a series of meetings with cabinet colleagues and other government officials this week to explore ways to revive the economy.

“The government could ask parliament to give its approval to defer the fiscal consolidation path this year,” the second government official said.

With the extra money, New Delhi is looking to spend more on bank recapitalizations, rural jobs programme and rural housing.

A final decision on stepping up the funding and breaching the fiscal deficit target will be taken by Modi, the officials said.

The faltering economy has given the opposition Congress party an opening to regain political ground against Modi, although the next general election is not due until 2019.

Even though industrial output posted a modest recovery on July, 15 of 23 manufacturing industries recorded a contraction, adding to concerns over the state of the economy.

Sluggish economic activity has also buffeted public finances. Finance ministry officials last week said the revenue shortfall in 2017/18 could be at least $13 billion if the economy failed to recover.

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Source(s): Reuters