The government is likely to stick to its fiscal deficit target of 3.2 per cent of GDP, and may accelerate sales of government stakes in lenders and other companies as part of an effort to recapitalise banks, said Surjit Bhalla, a member of the Prime Minister’s Economic Advisory Council, on Tuesday.
The government has already used up nearly all of its budget for the current fiscal year, and tax revenues are expected to fall far short of initial expectations. At the same time, economic growth has slowed, sparking calls for more stimulus.
But Bhalla said the government had stuck to its fiscal deficit targets over the past three years and is expected to do so this year as well.
The central bank has warned that missing the fiscal deficit target could lead to a spike in inflation, hurting macro-economic stability. Indian stocks slid last month on reports that a stimulus package worth up to ₹50,000 crore might be in the works — one that would widen the deficit to 3.7 per cent of GDP.
Economic growth slipped to its lowest level in three years in the first quarter, logging an annual rate of 5.7 per cent, but Bhalla said there were signs of recovery.
“I am more optimistic on the economy than I was two weeks ago,” he said, adding that last week’s industrial output and export data suggested fears about a slowdown were exaggerated.
He said GDP growth could be close to 6.5 per cent for the fiscal year — although that forecast is lower than the central bank’s latest estimate of 6.7 per cent.
Bhalla said the Council's views on the fiscal deficit has been communicated to the government by its chairman Bibek Debroy.
Banking woes
Bad loans in the banking sector hit a record ₹9.5 lakh crore at the end of June, with stressed loans as a percentage of total loans at 12.6 per cent, the highest level in at least 15 years.
That represents a major problem for Asia’s third-largest economy, as provisions eat into profits and new lending is choked off. The bulk of the sector’s bad loans are held by the 21 state-run banks.