Print Friendly, PDF & Email

India’s fiscal deficit

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

India’s fiscal deficit

What to study?

For Prelims and Mains: FD- meaning, implications, what is off budget spending? Implications.

Context: Former Economic Affairs Secretary S C Garg has stated that the true fiscal deficit for 2018-19 is 4.7%.

According to Garg, for the current financial year, too, the actual fiscal deficit is likely to range between 4.5 per cent to 5 per cent of GDP.

What’s the issue?

Contrary to these views, the Indian government says, the fiscal deficit just 3.4 per cent of the gross domestic product (GDP) for 2018-19. For the current year, the Union Budget presented in July expected the fiscal deficit to be 3.3 per cent of the GDP.

  • For long, it has been suspected that the official figures hide the true fiscal deficit. That’s because some of the government’s expenditure was funded by the so-called “off-budget” items. 
  • As a result, while this extra expenditure did not figure in the official calculations, it did mean that the true fiscal deficit or borrowing by the public sector was higher than the level presented in the Budget.

What is fiscal deficit?

It is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.
In other words, fiscal deficit is “reflective of the total borrowing requirements of Government”.

What is the significance of fiscal deficit?

  1. In the economy, there is a limited pool of investible savings. These savings are used by financial institutions like banks to lend to private businesses (both big and small) and the governments (Centre and state).
  2. If the fiscal deficit ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.
  3. Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
  4. So, simply put, a higher fiscal deficit means higher borrowing by the government, which, in turn, mean higher interest rates in the economy.
  5. A high fiscal deficit and higher interest rates would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.

What is the acceptable level of fiscal deficit?

There is no set universal level of fiscal deficit that is considered good.

Typically, for a developing economy, where private enterprises may be weak and governments may be in a better state to invest, fiscal deficit could be higher than in a developed economy.

Here, governments also have to invest in both social and physical infrastructure upfront without having adequate avenues for raising revenues.

 What should the ideal fiscal deficit look like?

In India, the FRBM Act suggests bringing the fiscal deficit down to about 3 percent of the GDP is the ideal target. Unfortunately, successive governments have not been able to achieve this target.

What is off- budget financing?

This refers to expenditure that’s not funded through the budget.

For example;

  1. The government sets up a special purpose vehicle (SPV) to construct a bridge.
  2. The SPV will likely borrow money to build the bridge on the strength of a government guarantee. If it’s not a toll bridge, the SPV will need government support to meet interest obligations.
  3. So, even though the borrowing and spending is outside the budget, it has implications for the budget and for all practical reasons should be included in that document.
  4. Since it’s not, this doesn’t reflect on the fiscal deficit number as well.

Concerns and implications:

  • Governments across the world use this to escape budget controls.
  • Off-budget financing by its nature isn’t taken into account when calculating fiscal indicators.
  • But the cost is borne by the budget through some mechanism or the other. Such financing tends to hide the actual extent of government spending, borrowings and debt and increase the interest burden.

Sources: Indian Express.