Why the fuss about fiscal deficit?

Why the fuss about fiscal deficit?

Context:

• India’s fiscal deficit in the past ten years (based on actuals) has hovered between 3.5% and 6.4% of nominal GDP.

Expenses overshoot

• In FY18, the Centre’s total income (as per the revised estimates) from taxes, non-tax revenues and capital items is estimated at Rs. 16.23 lakh crore.
• But it expects to incur a total expenditure of Rs. 22.17 lakh crore.
• Expenditure will thus overshoot income by about 36.5%, leaving a shortfall of Rs. 5.94 lakh crore.

Fiscal deficit:

• The fiscal deficit paints a more complimentary picture of government finances than necessary, because it counts both one-off receipts (from asset sales, recovery of loans etc) and recurring items (taxes) as part of the government’s ‘income’.
• India’s fiscal deficit in the past ten years (based on actuals) has hovered between 3.5% and 6.4% of nominal GDP.

Borrowings:

• The borrowing target for the year is closely watched by the bond market because the larger the government’s loan-taking, the less room for other borrowers — companies, small businesses, individuals — to raise funds from India’s relatively shallow bond market.
• By end-March 2018, the outstanding loans of the Central government are estimated to hit Rs. 82.32 lakh crore.

Unproductive spending:

• The bulk of the expenditure each year is absorbed by just three recurring items — interest payments, pensions and subsidies.
• In the FY18 revised estimates, for instance, interest payments (by far the largest item of expense) were expected to absorb Rs. 5.3 lakh crore, pensions Rs. 1.5 lakh crore and subsidies Rs. 2.3 lakh crore.
• Servicing interest payouts alone will take up 32% of the Centre’s earnings this year, while pensions and subsidies absorb another 23%.
• With 23% allocated to State grants and 16% to defence expenditure, these repetitive expenses will effectively mop up 95% of the total Budget receipts.
• In FY18, just 12% of the budget was defrayed in capital spending.

Fiscal Responsibility and Budget Management (FRBM) Act

•  Responsibility and Budget Management (FRBM) Act which enjoins the government to steadily tighten its fiscal and revenue deficits over the years, while reining in its debt-GDP ratio.
• It must also ensure that its receipts grow at a far faster pace than expenses in future, so that the debt can be paid down.

Progress on fiscal consolidation post-FY14:

• For starters, in the four fiscal years between FY14  and FY18, the Centre’s receipts have grown at a faster pace than its expenditure.
• The Centre’s total receipts (excluding borrowings) have shot up by 50% between FY14 and FY18.
• Total expenditure in the same period registered a slower 39% increase.
• Even better, spending on interest, pensions and subsidies rose by a much lower 30%, thus freeing up room for other expenditure.
• The reined-in deficit has meant lower recourse to borrowings in order to bankroll spending.
• In FY14, as much as 32% of annual Budget spending came from borrowings, but by FY18 it was down to 27%.

Conclusion:

• It is important for government to stick to its path of  fiscal consolidation.