Budget 2018: Cut Deficit, Lift Capex - Next Year's Budget Goal

India’s Finance Minister Arun Jaitley is likely to deliver mostly good news on fiscal consolidation when he unveils next year’s budget on Feb. 1. The government is set to overshoot its deficit target in the current year through March, largely due to lower dividend payments from the central bank. The proposed Budget 2018 for fiscal 2019 though, will look better -- for deficit reduction and investment plans.

The consensus view is that Jaitley has to choose between two competing goals: either purse its aim to cut the deficit to 3% of GDP, or boost investment needed to spur growth and reduce bottlenecks in the economy -- not both. Bloomberg Economics’ view is that the trade-off isn’t so stark. Sales of government-owned assets and increased revenue from goods and services tax reform mean Jaitley should be able to net sufficient revenue to meet both objectives.

BE expects the budget deficit to come in at 3.4% of GDP in fiscal 2018, down from 3.5% in the previous year. That would exceed the government’s target of 3.2%, reflecting lower-than-expected revenue as demonetization squeezed profits of the Reserve Bank of India and the GST dented growth. That would still be within a relaxed limit of 3.5% of GDP afforded by a review committee that gave the government more wiggle room on account of those major structural reforms. And for the year starting in April, the government should be able to stick to its original target for a deficit of 3% of GDP, as the reforms clear the way for faster growth and stricter compliance -- improving tax buoyancy.