NEW DELHI: With the economy slowing and investments plunging to a record low, all eyes are now on the Union budget to be presented on 5 July. India’s new finance minister, Nirmala Sitharaman faces the unenviable task of boosting demand and investor sentiment while trying to avoid a sharp deterioration in fiscal metrics -- which could end up making any fiscal stimulus counter-productive.
Over the past three decades, the loosening of the fiscal purse strings (a higher fiscal deficit) has been associated with higher inflation rather than higher growth, the data suggests.
India’s fiscal deficit began rising since the mid-1980s, driving growth initially, and then fanning the fires of inflation leading up to the 1991 economic crisis. A course correction followed, which helped lower the deficit, and bring down inflation. With the passage of the Fiscal Responsibility and Budget Management Act in 2003, hard targets on government borrowing were set. This helped set market expectations, and laid the conditions for the boom that followed in the 2003-08 period.
The 2008 financial crash led to a loosening of purse strings once again. That too didn’t end well. It helped sustain a long era of inflation and inflationary expectations, and pushed up India’s current account deficits to unsustainable levels. At the first hint of panic among emerging markets investors in 2013 (the so-called taper tantrum), investments in India became the first casualty, with the rupee suffering the worst rout in many years.
Again a course-correction followed after the mini-crisis of 2013, which has been sustained, with some slips and misses, till now.
Will 5 July signal a shift in India’s fiscal management once again?
Nikita Kwatra contributed to this piece.