Arun Jaitley's stimulus package to boost GDP growth may breach fiscal deficit target

There is already a strong buzz that the government is planning a special package to revive the fortunes of the economy as the GDP growth rate  has been on decline for the few quarters, with the first quarter GDP slumping down to 5.7% in the current financial year.

Though nobody knows the broader contours of the special or stimulus package, economists are not very sanguine if the government has the fiscal or monetary space for any such package. Though they believe some targeted intervention could prop up the economy.

Easier said than done
The biggest challenge in the economy has been that investments, especially the private sector investments remain muted. Though government has been trying to do its bit since the last two-three years, the fact that the share of government spending in the total capex is just 12% gives little hope that government spending alone would have much of a difference on the ground.

"Though in the last three years, the government has increased investments it remains a fact that government spending as a percentage of GDP remains at flat 1.8% of the GDP in the past three years," says Sunil Kumar Sinha, principal economist, India Ratings.

And even if the government wants to increase spendings, it has very little fiscal space.

"Right now there are several fiscal concerns related to  revenue streams of the government. The RBI surplus is half of last year. Even the telecom receipts budgeted look ambitious, disinvestment has gotten off to a good start, but we are not sure if the full year target would be met," says Aditi Nayar, principal economist, at rating agency ICRA.

The slump in first quarter GDP growth rate to 5.7% has already put pressure on the revenue collection target. On the backdrop of uncertainty over the GST collection in the first year, nobody knows if the government would be able to meet the revenue targets in the current financial year.

Under such circumstances, the government cannot offer a special package without breaching the fiscal deficit target of 3.2% for the current financial year.

Rate cuts not in government domain
One way of propping up the economy could have been interest rate cut, but that is not a government domain. It is up to the RBI to decide if they can cut interest rate or not.

With the wholesale inflation rose to a four-month high of 3.24% in August, the central bank would be very cautious with any rate cut move given its mandate of keeping the inflation within a target range.

"Since 2016 till date, there has been a 200 bps rate cut, what has been achieved on ground. Do you think another 25 bps rate cut would make any difference in the immediate term," says Sunil Kumar Sinha of India Ratings.

Exports need a stimulus
However, some economists believe that targeted intervention may have some impact. They think the issues of exporters can be addressed by resolving the issue of GST refund and checking the rupee appreciation.