Fiscal slippage, no more an educated guess?

Hours before the presentation of the Union Budget, it is almost official that the fiscal deficit will be wider than what has been projected in the last Budget.

Fiscal deficit is the difference between the government’s income and expenditure.

The government estimated budget deficit to be 3.3 per cent or over ₹7 lakh crore for the current fiscal – 2019-20. With fall in revenue (both tax and non-tax), it is estimated to go up by 40-70 basis points (100 basis points = 1 per cent). Now, the Economic Survey has advocated that considering the urgent need to revive economic growth, the fiscal deficit target may have to be relaxed for the current year.

Many of the economists feel that even the next fiscal year – 2020-21 – would be challenging in terms of fiscal consolidation, and now the survey has endorsed this view. “While on one hand the outlook for global growth persists to be weak, with escalated trade tensions adding to the risk; on the other hand, the pace of recovery of the growth will have implications for revenue collections,” the Economic Survey said.

It has advocated that in order to boost the sluggish demand and consumer sentiments, counter-cyclical fiscal policy may have to be adopted to create additional fiscal headroom. During the first eight months of 2019-20, the indirect tax collections have been muted. Therefore, revenue buoyancy of the GST would be key to the resource position of both Central and State governments.

On the expenditure side, rationalisation of subsidies, especially food subsidy, could be an important tool for expanding the headroom for fiscal manoeuvring. The Fifteenth Finance Commission reportedly has also submitted its Interim Report and its recommendations, especially on tax devolution, would have implications for Central Government finances. The geopolitical situation unfolding in West Asia is likely to impact oil prices, and thereby petroleum subsidy, apart from having implications for current account balance.

‘Prioritise growth’

D.K. Srivastava, Chief Policy Advisor with EY India, said that the fall in the nominal and real GDP growth in FY20 has affected the tax revenue growth not only of the central government, but also of the state governments, both with respect to the transfers that states receive from the Centre and states’ own tax revenues. “Their share in investment has been envisaged as equal to that of the Centre, but the erosion of their base year revenues in FY20 would adversely affect the prospects of their tax revenue growth in FY21. After the implementation of the GST, they have not been left with any significant buoyant own tax revenue sources,” he said.

Rumki Majumdar, Economist, Deloitte India, suggested that the government prioritise growth, particularly in the backdrop of weak private consumption demand and investment. “Once the momentum picks up, the government can take action to consolidate its expenses. Several economies have done this in the past. For instance, Germany – a strong proponent of a balanced budget – incurred a strong fiscal deficit during 2008-09 to help the economy come out of the crisis. The US fiscal deficit shot up to 8.1 per cent during this crisis. However, the nature of spending will be crucial,” she said.

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