Centre should stick to fiscal deficit target of 3.4% of GDP: RBI governor Shaktikanta Das

Reserve Bank of India (RBI) governor Shaktikanta Das has urged the government to stick to the fiscal deficit target in the forthcoming Budget and continue on the fiscal consolidation path. It comes amid concerns over a slowdown as the country’s Gross Domestic Product (GDP) growth fell to 6.8% in 2018-19. The suggestion is part of the pre-Budget proposals submitted by the RBI to finance minister Nirmala Sitharaman. Sitharaman is scheduled to present the first Budget of the new government on July 5.

In February, the interim Budget had projected a fiscal deficit target of 3.4% for 2019-20. 
“Private investment needs to pick up, as a public investment alone cannot spur growth. To make resources available for private investment, the government should stick to its fiscal deficit target. Higher fiscal deficit leaves it with no option but to borrow more,” the governor is said to have told the government.

An increase in government borrowing leads to crowding out of private investment and therefore a reduction in private investment. 

If the borrowings by Centre, states and public sector cross 8.5% of the GDP, very less is left for the private sector out of the available investible resources, as per the regulator.
The household sector’s net financial savings, along with net capital inflows, add up to the total investible surplus of 9.5% of the GDP.

If the government tries to fulfill the commitments made in the election manifesto, it will be difficult for it to contain fiscal deficit, thus increasing its borrowings.
At present, with the Centre’s fiscal deficit at 3.4% of the GDP, and states and public sector at 3% and 2.5% respectively, the government has no scope for breaching the fiscal deficit target, or including large expenditure programmes in the Budget.

As the deficit is financed through borrowings, less funds become available for private lending, putting pressure on interest rates.
The central bank has estimated the GDP growth at 7%, lowering its earlier estimate of 7.2% for 2019-20. To increase consumption and support growth, the RBI has already announced three consecutive repo rate cuts during 2019.

To further bolster the spending power of people, the banking regulator has suggested that the government should give tax incentives to homebuyers in the Budget. It is also in favour of giving a boost to the equity market by providing relief to investors who are facing the double whammy of Long-Term Capital Gains (LTCG) tax and Securities Transaction Tax (STT). The regulator is of the view that investors in the capital market should be given relief by allowing for adjustment of STT against LTCG tax.  The government in the Budget 2018-19 brought back a 10% LTCG tax on equities while retaining the STT. Das, though, favoured LTCG tax as it helped in tracking transactions.