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MOSL: ECOSCOPE-Fiscal slippage does not necessarily imply growth recovery

ECOSCOPE: Fiscal slippage does not necessarily imply growth recovery

• The Finance Minister Ms. Nirmala Sitharaman hinted at fiscal slippage in a discussion on the state of the economy in the Rajya Sabha on 27th Nov'19. While some market participants expect fiscal slippage to pave the way for growth recovery, through this note, we argue four reasons that negate the direct connection.
• First, if fiscal slippage is led by a shortfall in receipts rather than spending expansion (most likely to be the case this year), it will not lead to any growth recovery. At best, lower-than-budgeted spending may limit the downward revision in growth projections. However, most growth forecasts - even those that are revised downwards - have not yet fully incorporated the possible reduction in fiscal spending growth.
• Second, with growth witnessing a slowdown and gross domestic savings (GDS) also declining substantially, the fears of crowding out are still real. This is also reflected in the exceptionally large spread between the policy interest rate and the benchmark sovereign bond yield. Additional fiscal deficit, thus, could tighten financial markets further, offsetting any incremental positive impact.
• Third, hinting at fiscal slippage toward the year-end with no indications of further slippages in subsequent years is unlikely to boost confidence, and thus, animal spirits.
• Finally, any slippage in the reported fiscal deficit for FY20 must be combined with the off-budget transactions to gauge whether it would lead to growth recovery or not. If the adjusted fiscal deficit (including off-budget spending) in FY20 turns out to be lower than in FY19, it will not lead to any growth recovery.
• Thus, we conclude that higher fiscal deficit does not necessarily imply growth recovery.