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DAILY NEWS ANALYSIS

  • 08 January, 2021

  • 15 Min Read

India's Fiscal Deficit may exceed 7%

India’s Fiscal Deficit to exceed 7%

  • India’s fiscal deficit for the year ending in March is likely to exceed 7% of gross domestic product, three sources told Reuters, as revenue collections suffered from a lockdown and restrictions to rein in the spread of COVID-19.
  • The government had in February projected a deficit of 3.5% for the current year.
  • It estimated government borrowing of Rs. 7.8 trillion, later revised to Rs. 12 trillion, to provide relief to millions of people and businesses hurt by the pandemic.
  • “The fiscal deficit will be bigger than what is estimated by some ... our revenue collections suffered due to the complete lockdown in the first three months and that is hard to recover,” said a source with direct knowledge of budget discussions. “We’re looking at a 7% plus.”
  • Two of the sources said the revenue shortfall from tax and divestment of state-run companies could be as much as Rs. 7 trillion.
  • The pandemic and stringent lockdown imposed in the early stages hit India hard.
  • Asia’s third-largest economy recorded its first-ever recession with a contraction of 23.9% in the April-June quarter and a 7.5% fall in the September quarter.
  • Another senior government source said finances were in poor condition because of the shortfall in tax receipts, but the government has little room to cut spending as revival of the growth remains top priority.
  • “We could see the worst-ever fiscal deficit numbers in the current financial year,” said another government source, adding the fiscal deficit could touch 8% of GDP.
  • The final deficit estimates will be announced by Finance Minister Nirmala Sitharaman on Feb. 1, when she presents the annual budget.

Different Measures of Government Deficit

Revenue Deficit

  • It refers to the excess of the government’s revenue expenditure over revenue receipts.
  • Revenue Deficit = Revenue expenditure – Revenue receipts
  • The revenue Deficit includes only such transactions that affect the current income and expenditure of the government.
  • When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

Fiscal Deficit

  • It is the gap between the government’s expenditure requirements and its receipts. This equals the money the government needs to borrow during the year. A surplus arises if receipts are more than expenditures.
  • Fiscal Deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts).
  • It indicates the total borrowing requirements of the government from all sources.
  • From the financing side: Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
  • The gross fiscal deficit is a key variable in judging the financial health of the public sector and the stability of the economy.

Primary Deficit:

  • Primary deficit equals fiscal deficit minus interest payments.
  • This indicates the gap between the government’s expenditure requirements and its receipts, not taking into account the expenditure incurred on interest payments on loans taken during the previous years.
  • Primary deficit = Fiscal deficit – Interest payments

N K Singh Committee Review of FRBM, 2016

  • The Committee consisted of Urjit Patel, Sumit Bose, Dr Arvind Subramanian etc.
  • Fiscal Deficit as the operating target: to bring down public debt. Reduce it to 2.5% by 2023 (from current 3.5% in 2017).
  • The public Debt to GDP ratio is to be considered a medium-term anchor for fiscal policy. The combined Debt to GDP ratio is to be reduced to 60% by 2023 (40 for the Center and 20 for States). Currently, it is 49.4% and 21% respectively.
  • Reduce Revenue Deficit steadily by 0.25% each year, to reach 0.8% by 2023 (from 2.3% in 2017). It recommended not to finance Govt's day to day expenditure through borrowings.
  • Formation of Fiscal Council to advice the government.
  • Escape Clause to accommodate counter cyclical issues and exceptional circumstances like during recession. The Committee set 0.5% as escape clause for FD target. These situations are
  • National security, acts of war, calamities of national proportion and the collapse of agriculture severely affect farm output and incomes.
  • Far-reaching structural reforms in the economy with unanticipated fiscal implications.
  • The sharp decline in real output growth of at least 3 percentage points below the average for the previous four quarters.
  • Deviation from the stipulated fiscal deficit target shall not exceed 0.5 percentage points in a year.
  • The Escape Clauses can be invoked: by the Government after formal consultations and advice of the Fiscal Council and with a clear commitment to return to the original fiscal target in the coming fiscal year.
  • Fiscal consolidation should also be made by the States.
  • Both monetary and fiscal policies must ensure growth and macroeconomic stability in a complementary manner.
  • Buoyancy: With the higher Economic growth, FD should be reduced accordingly.

Source: TH


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