Run-up to Budget 2018-19: India's medium-term fiscal outlook under a cloud

It is now increasingly looking unlikely that the Centre will be able to meet its targets for key macroeconomic variables for 2017-18, as detailed in the medium-term fiscal road map last year. This, in turn, will impact the government’s ability to meet the BUDGET 2018-19 targets as well.

First, economic growth has dipped in the current financial year. It is unlikely to pick up sharply in FY19, as the economy struggles to deal with the twin shocks of demonetisation and the goods and services tax (GST).

Second, a sluggish economy, coupled with the uncertainty under the new indirect tax regime and lower dividends from the Reserve Bank of India (RBI), will probably ensure that the government fails to meet its revenue target this year. Failure to do so reduces the likelihood of the government sticking to its fiscal deficit target, unless expenditure is curtailed drastically.

Lower revenue collection, in turn, puts upward pressure on government borrowing, ensuring that it deviates from the glided path of debt reduction.