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Breaching 3.2% fiscal deficit target? What it means

In the given scenario, analysts say that the fiscal deficit could now rise to 3.5 per cent of the GDP and this slippage means that the expected target for the next fiscal – 3 per cent, will not be adhered to.

Written by: India TV Business Desk, New Delhi [ Updated: January 31, 2018 17:00 IST ]
Breaching 3.2% fiscal deficit target? What it means
Breaching 3.2% fiscal deficit target? What it means

The fact that this will be the last full Budget for the ruling dispensation before the country votes to elect a new government in 2019, expectations are skyrocketing in all sectors. However, the government faces a major challenge of meeting its 3.2 per cent fiscal deficit target of the GDP for the current fiscal.

Understanding fiscal deficit and its importance

The difference between total expenditures and revenues (excluding borrowings) of the government in a financial year is referred as fiscal deficit. It is important because it gives borrowing requirements of the government to meet its target expenditures in various sectors and schemes.

However, it should be noted that while calculating the total revenue according to the formula, borrowings are excluded.

Fiscal deficit formula: Total expenditure – total receipts (excluding borrowings)

Here it is important to mention that if borrowing is added in total receipts, the fiscal deficit will be 0. Borrowing includes not only the loan amount but also interest on loan.

What high fiscal deficit means and factors behind it

Primary factors that point to fiscal deficit include high spending, poor economic activities, high inflation and lower revenue collections. A high fiscal deficit means putting at risk the country’s overall growth rate. Besides, it also poses serious questions to the government’s economic management abilities.

In an ideal system, expenditure is low whereas growth advances. But when there is an increase in fiscal deficit, it means that the government is exceeding its spending target while it is earning less.

Current scenario in India

Given the fact that the GST and overall tax collections were not upto the mark, and also the RBI and PSUs refusal to cough up more to meet government expenditures, the latest figures make it tough for the government to rein in the target. Thus, the risk of government breaching fiscal deficit target for the current fiscal is very high.

The current state of affairs poses serious challenges for the policymakers because the deficit, according to government data, was already 112 per cent of the Budget at the end of November -- raising concerns about whether the government can meet the goal or not.

India Tv - Representational pic

Representational pic

Latest data showed that receipts from GST dipped to Rs 80,808 crore in November -- lowest since GST’s July introduction. This was a 14 per cent drop from receipts in August, the first month of tax collection under the GST regime.

The steep slowdown in collection, experts say, was largely because of the sharp cut in rates for items and also poor compliance in the 7-month-old new tax regime.

They even say that continuous downfall in revenue collection post-GST forced the government to borrow an additional Rs 50,000 crore in the last quarter, putting the net borrowing at the highest level since 2013-14. However, the Finance Ministry later announced that it would scale back its additional borrowing to RS 20,000 crore from its earlier plan.

“The government has reassessed additional borrowing requirements taking note of revenue receipts and expenditure pattern,” Subhash Chandra Garg, Secretary, Department of Economic Affairs, said.

“The breach in fiscal deficit can be attributed to the shortfall in GST collections, along with a reduction in meeting the overall tax collection targets. Other key reasons for the deficit breaching the target is lower dividend receipts from PSBs," Anis Chakravarty, Lead Economist, Deloitte India, said.

Also the sluggish revenues and front-loading of expenditure due to early presentation of the Budget are among major factors for the widening deficit.

Reports say that the sluggish economy may also result in a shortfall in corporation tax.

Aditi Nayar, an economist at credit rating agency ICRA, said that GST receipts and sluggish economic activities have been a cause for concern, thus fiscal slippage persist. She said that the slowdown due to the twin implementation of back-to-back two key decisions – demonetisation and GST can’t be ignored, adding that tax revenues, dividends and inflows from other communication services undershoot the budgeted level.

India Tv - File pic of Finance Minister Arun Jaitley

File pic of Finance Minister Arun Jaitley

According to information available from the Finance Ministry, the government has so far managed to raise about Rs 54,000 crore of the targeted Rs72,000 crore through disinvestment. However, there are reports that government could garner profits of above Rs 90,000 crore, compared with the estimate by March end.

There also concerns on the non-tax revenue side which includes dividends from public sector banks and the RBI. Non-tax revenue is only 36.5 per cent of the full-year target in the first 8 months. The Central Bank has transferred Rs 30,659 crore as a dividend to the government, less than half the surplus it transferred the previous year.

In the given scenario, analysts say that the fiscal deficit could now rise to 3.5 per cent of the GDP and this slippage means that the expected target for the next fiscal – 3 per cent, will not be adhered to. However, the government had on many occasions appear confident that the target will be achieved.

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