Fiscal slippage does not necessarily imply growth recovery
28 November 2019
The Economy Observer
The Finance Minister Ms. Nirmala Sitharaman hinted at fiscal slippage in a discussion on the state of the economy in the
Rajya Sabha on 27 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.
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.
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.
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.
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.
“Quite a lot of concern has been raised by the fiscal deficit. In the July budget, I
pegged it at 3.3% (of GDP). Although the FRBM Act has been there since 2004, on
average, the fiscal deficit during UPA-2 was 5.5% of GDP. There are difficulties in
maintaining that discipline and sometimes, it is not possible. If that’s the level of
fiscal deficit they maintained, and today, even when I am facing the challenges and
addressing them, the anxiety about fiscal deficit, I appreciate the anxiety, but people
who ran it well above 5%, should know what is fiscal management,"
Minister Nirmala Sitharaman on 27
These statements have led to expectations of fiscal slippage in FY20, which in turn
has made various participants believe that some recovery in real GDP growth is
forthcoming. Nevertheless, we argue that even if the government accepts fiscal
slippage this year, any meaningful growth recovery is highly unlikely for four
If the fiscal slippage is
driven by lower-than-
expected receipts and fiscal
spending still remains
then implies limited
downward revision in
growth, not a recovery in
the drivers of fiscal slippage will determine its impact on growth. If a slippage
is associated with higher-than-budgeted (or expected) fiscal spending, then it may
lead to higher-than-otherwise growth. However, if the slippage is driven by lower-
than-expected receipts and fiscal spending still remains lower-than-budgeted, then
it implies limited downward revision in growth, which is very different from any
recovery in growth. This is because most growth forecasts – even those that are
revised downwards – have not fully incorporated the possible reduction in fiscal
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
– Research Analyst
(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196
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