Sticking to fiscal deficit target at the expense of growth may be counterproductive

Apart from the CSO’s GDP numbers, another recent data release that has caused much consternation is the Controller General of Accounts’ report on the Central Government’s fiscal deficit breaching 102 per cent of the full-year estimate in the first seven months of FY20. For April-October 2019, the Centre’s total receipts at ₹9.34 lakh crore fell far short of its expenditure of ₹16.5 lakh crore, resulting in the fiscal deficit topping ₹7.2 lakh crore. While the Opposition has promptly latched on to this to declare that the government was in a state of ‘financial emergency’, government spokespersons have staunchly reiterated that they have no intention of shifting the 3.3 per cent deficit goalpost. But given the dire state of the economy, a little flexibility on fiscal deficit targets may not be out of place.

There are three strong arguments for why the Centre cannot afford to be dogmatic about its deficit targets right now. One, unlike past slowdowns, the downturn that presently has the economy in its pincer-grip has impacted both its investment and consumption drivers. Despite corporate tax cuts, private investments appear unlikely to kick-start anytime soon, amid the freeze in credit flow and pervasive signs of demand weakness. Therefore, the only weapon in the Government’s armoury to keep the economy chugging is productive expenditure. Two, over-ambitious revenue targets inevitably lead to over-zealous efforts by the taxman to meet them, leading to tax terrorism that causes lasting damage to the country’s reputation. Tax buoyancy cannot return without the economy charting a credible revival from its slump. Three, it is desperation to ‘meet’ unrealistic deficit targets that leads to dodgy practices that end up compromising the very credibility of the Budget. There’s no point in numerically meeting fiscal deficit targets by unduly delaying contractual dues to State governments and private enterprises, resorting to off-balance sheet borrowings or scrambling to ‘disinvest’ through last-minute intra-PSU deals.

It may therefore be pragmatic for the Centre, at this juncture, to consider relaxing its 3.3 per cent fiscal deficit target for this year, while laying down a clear roadmap for a return to the path of fiscal prudence within a timeframe. Even the NK Singh committee on FRBM review had allowed the Centre such leeway through a force majeure clause that would kick in if real output contracted by over three percentage points in consecutive quarters. Yes, any hint of deficit slippage usually leads to a spike in borrowing costs for the Centre, but if accompanied by greater credibility on numbers, the bond markets impact can be contained. Such relaxation however, must go hand-in-hand with serious effort to rein in the Centre’s revenue expenditure, which continues to be profligate. Rather than focussing on drumming up revenues, efforts now need to be made on a war footing to prune the plethora of overlapping, improperly targeted and ineffective welfare schemes that have been ushered in by successive governments in their bid for competitive populism.

COMMENT NOW