Big Story

Big Story: What is the actual fiscal deficit?

In the Budget this year, besides the fisc ratio, pay attention to the critical factors that help understate the actual number

There has always been high drama over the Centre’s fiscal deficit number in the run up to the Budget. But this year, given the sharp fall in investments and consumption — that has dragged the real GDP growth of the Indian economy to a 11-year low — the noise around it has only grown louder.

The million dollar question is: After setting a hard-to-achieve 3.3 per cent fiscal deficit target for FY20, will the Centre continue to keep a tight leash on fiscal deficit in FY21, or will it allow it to slip notably?

While it is true that the Centre’s current fiscal deficit position will determine the scope of its future expenditure, the fiscal deficit ratio reveals only half the story. The more critical issues of rising public borrowings and the accounting jugglery in disinvestments and food subsidy are often overlooked.

We bring you the big picture on the fiscal deficit arithmetic.

The number game


In the Budget, the Centre primarily puts down its revenue and expenditure projections for the coming fiscal, in turn, laying down its fiscal deficit estimates (excess of expenditure over receipts).

In the Budget (post elections) for FY20, the Centre had pegged the fiscal deficit ratio at 3.3 per cent of the GDP.

But this proved only an optical treat, given the dodgy estimates on revenues and stretched assumptions on GDP growth.

Sample this. The provisional actual figures for 2018-19 that were released by the Controller General of Accounts (CGA) — which showed a shortfall of ₹1.67-lakh crore in tax revenues — were ignored in the FY20 Budget. The FY20 projections, which were based on the revised estimates for FY19, instead, had made the Centre’s revenue estimates unachievable, right from the start.

For instance, while the growth in income-tax revenues was projected at about 7.5 per cent in FY20 based on the FY19 revised estimates, it worked out to a steep 23 per cent based on the CGA’s actual estimates for FY19. On the non-tax front, the Centre had set a higher ₹1.05-lakh crore disinvestment target, which also appeared a difficult feat.

The Centre, however, found some respite after the Bimal Jalan Committee recommended a surplus transfer by the RBI — ₹60,000-65,000 crore above what was estimated in the Budget. But this was offset by the sharp corporate tax cuts announced by the Finance Minister subsequently.

So, where do we stand now?


According to CGA numbers as of November 2019, the fiscal deficit has already breached 115 per cent of the budgeted figure for FY20.

Gross tax revenues have risen by a modest 0.8 per cent year-to-date. Income-tax collection have grown just 7 per cent y-o-y.

Indirect taxes have fallen about 1 per cent YTD. Measly disinvestment proceeds of ₹18,000 crore so far (details under disinvestment section) is an added dampener.

The Centre normally cuts back on its expenditure in the last quarter of the fiscal, to rein in the fiscal deficit. This year, Central government spending gained momentum (as per CGA figures) in September, and more significantly in October and November. This has limited further spending in the second half, which could impact growth. As such, growth in government expenditure has not been broad-based. While revenue expenditure growth has been led by transfer to States, interest payments, defence pension payouts and fertiliser subsidy, capital expenditure has largely been driven by capital outlay on the defence services and the Railways.

Hence, taking into account the weak revenues, and the cut back in expenditure, the fiscal deficit could slip by 0.3-0.4 per cent in FY20, implying a fiscal deficit of 3.6-3.7 per cent in FY20. (The Supreme Court judgement on telecom companies’ adjusted gross revenues could, however, offer respite.)

In the upcoming Budget, assumptions around revenue, expenditure and the nominal GDP growth will be keenly awaited.

Importantly though, the Centre will have to consider realistic FY20 numbers (based on CGA estimates thus far) for the FY21 fiscal deficit to be credible.

High on borrowings


But the problem with a narrow view of the fiscal deficit — essentially just a fiscal deficit ratio — is that it completely glosses over the critical issue of rising public borrowings (Centre, States and public sector enterprises).

The Centre’s gross borrowings for FY20 are pegged at ₹7.1-lakh crore, a steep 24 per cent increase from FY19.

Such large borrowings lead to crowding out of the private sector, and add pressure on domestic interest rates and liquidity.

The Centre’s gross borrowings so far this fiscal (up to January 10) has been ₹6.5-lakh crore. A notable slip in the fiscal deficit would imply additional borrowings over and above the budgeted ₹7.1-lakh crore.

Adding to the Centre’s borrowings is the concern of a steep rise in State borrowings in recent years.

From ₹1.96-lakh crore in 2013-14, gross State borrowings shot up to ₹4.78-lakh crore in FY19. For the current fiscal, gross State borrowings have been about ₹4-lakh crore so far. Past data suggest that State borrowings for the last quarter tend to shoot up (40-50 per cent higher than in the first nine months).

Given the weak State finances, State borrowings could well near ₹5.5-lakh crore this fiscal.

Hence, State and Central gross borrowings together are likely to be about 6 per cent of the GDP in FY20.

In FY21, even if we assume a 9 per cent nominal GDP growth and a fiscal deficit ratio of 3.5 per cent, Central borrowings alone could be close to ₹7.8-lakh crore. Add State government borrowings (which have grown about 20 per cent annually over the past five years), and the combined borrowings could be 6.5 per cent of the GDP in FY21.

Then there are other borrowings that are often ignored.

A major portion of the reduction in expenditure in FY19 came from crimping on food subsidies. To make good the shortfall, the Food Corporation of India (FCI) borrowed from the National Small Savings Fund (NSSF) (as in the past: see section on food subsidy).

The government has also been dipping into the pool of small savings fund to finance its fiscal deficit and fund the needs of public institutions. Small savings rate are kept high to ensure adequate flows into small savings, which in turn implies that financing through the NSSF comes at a high cost.

From ₹12,357 crore in FY14, financing through small savings jumped to a little over ₹1-lakh crore in FY18. In FY19, as against a budgeted ₹75,000 crore, the Centre borrowed ₹1.25-lakh crore (as per the Budget).

For FY20, financing through small savings is pegged at ₹1.3-lakh crore.

The Centre has also dipped into this pool to fund public agencies such as FCI and the National Highways Authority of India (NHAI). In FY19, additional investments in public agencies —NHAI, PFC, REC, IRFC and others — was over₹1.5-lakh crore. In FY20, the additional investments in public agencies has been pegged at over ₹1.7-lakh crore.

Then there is the growing reliance of the Centre on off-balancesheet borrowing. Funds raised by Central public sector enterprises — know as Internal and Extra Budgetary Resources (IEBR) — in recent years, have been used to fund capital expenditure. The IEBR is kept out of the fiscal deficit calculation.

In FY20, while the gross budgetary support for total expenditure is ₹27.86-lakh crore, the IEBR is ₹5.37-lakh crore.

The combined public borrowings of the Centre, the States and public sector enterprises come to over 8.5 per cent of the GDP.

Also, the staggering ₹2.7-lakh crore of capital infused into public sector banks in the past three fiscals has been done through the issue of recap bonds that don’t picture in the fiscal deficit calculation. Sooner or later, the Centre will have to repay the interest and face value on these bonds.

Disinvestment by hook or by crook

It is no secret that the Centre has been too ambitious in targeting to raise ₹1.05-lakh crore by selling its stake in various Central public sector enterprises (CPSEs) in 2019-2020.

Given the moribund state of the broader stock market and weak sentiment due to the ongoing slowdown, the Centre has managed to raise just ₹16,213.38 crore through sale of stakes in Rail Vikas Nigam, IRCTC and RITES and CPSE and Bharat 22 ETFs (exchange-traded funds). It managed to raise another ₹1,881 crore through sale of enemy shares, leaving the shortfall at ₹86,906 crore.


This shortfall is, however, not surprising. If we look at the disinvestments since 1991-92, the Centre had given divestment targets in the Budget in 25 years.

Out of these, it failed to achieve the target in 19 years. Given the lackadaisical manner in which CPSEs are managed, their lack of competitiveness, poor profitability and governance risk, investors have been rather indifferent to these offers.

Greater reliance, more jugglery

What has changed in recent years is that the Centre is leaning heavily on disinvestment funds to shore its fiscal deficit and is trying to meet the target by hook or by crook.

The NDA government has been more aggressive with its divestment targets, moving it to ₹69,500 crore for 2015-16 and to ₹1-lakh crore in 2017-18. While the proceeds from this head amounted to 6 per cent of the fiscal deficit in 2010-11, it spiked to 15 per cent of the budgeted fiscal deficit for FY20. Almost 4 per cent of the revenue receipts are budgeted to be raised by selling stakes in PSEs by the Centre, in FY20.

Between 2003-04 and 2012-13, the bulk of the disinvestment funds were raised from public offers. But this has changed since 2013-14, the last year of the UPA regime.

The government raising money through share buybacks, ETFs and sales in the secondary market made an entry that year. These means have become more popular in the past five years, accounting for more than 80 per cent of the proceeds in some years.

The guidelines on capital restructuring of CPSEs, issued in 2016, laid down the ground rules to ensure that enough money is regularly paid by these entities to the parent, through dividends and buybacks.

The Centre raised ₹39,532 crore through share buy-backs between 2015-16 and 2018-19. Another ₹13,722 crore was raised through block deals and sales in the secondary market between 2016-17 and 2019-20. Cross-selling among CPSEs has also become increasingly popular over the past three years. This is not a novel idea and has been used in the past to cross-purchase shares between ONGC, GAIL and IOC, and to sell stakes in Bongaigaon Refinery, Kochi Refinery, Madras Refinery and IBP to other PSU entities.

But the humongous sale in 2017-18, raising ₹36,915 crore by selling the Centre’s 51.1 per cent stake in HPCL to ONGC, was a bit of a shocker. Another deal in 2018-19, wherein REC’s 52.6 per cent stake was sold to Power Finance Corporation, helped raise ₹14,499 crore.

Such stake sales have raised the question whether the Centre needs to recalibrate its disinvestment targets, instead of resorting to accounting entries to achieve the targets. There is also a question mark over the actual demand for CPSE shares in the public offers.

Many of the share-sale offers from these entities received lukewarm response from investors, resulting in the Centre turning to LIC, the government-controlled insurance behemoth, to bail it out.

Another method the Centre has been increasingly resorting to in recent times is bundling of CPSE shares or debt and selling them as ETF units. While the first tranche of CPSE ETF was launched in 2013-14 to raise ₹3,000 crore, this route has helped the Centre raise ₹68,080 crore between 2016-17 and 2019-20.

In fact, over 77 per cent of divestment proceeds so far in FY20 have been raised through the ETF route.

What to watch

The strategic sales of 100 per cent stake in Air India, 53.29 per cent stake in BPCL and 30.8 per cent stake in CONCOR has been on the anvil this fiscal. With the Centre unlikely to push through these sales before the end of March 2020, there are reports that the disinvestment target for FY21 is likely to be bumped up to ₹1.5-lakh crore. While strategic sale of CPSEs which can benefit from private ownership is welcome, it would be better if the Centre draws up a cohesive plan for managing CPSEs — the segments it needs to stay in and where it has to exit.

It needs to focus on improving the efficiency of these entities, making them comparable to their private sector peers in operations and strategic planning. The disinvestment strategy should be guided by these requirements and not by the need to plug the fiscal hole.

Food subsidy: Centre shifts the burden to FCI


With every passing year, food subsidies have been increasing. While the implementation of the National Food Security Act, 2013 is one reason; in recent years, it has also been due to the increase in minimum support price (MSP) (to give a 50 per cent margin to farmers over cost of production).

For 2019-20, the total food subsidy bill amounted to ₹1.84-lakh crore, a sharp rise from previous years. The jump in food subsidies, however, has not disturbed the finances of the Centre.

In the past three years, the Centre has kept its outgo on food subsidies closer to ₹1-lakh crore, or less, by forcing the Food Corporation of India (the agency responsible for procuring food grains at MSP and distributing it to States) to cough up the balance amount.

In 2017-18, according to the Controller General of Accounts (CGA), against a total food subsidy of ₹1.4-lakh crore provisioned in the Budget, the Centre spent only ₹1-lakh crore. In 2018-19, while the provision in the Budget was for ₹1.71-lakh crore, the Centre spent only ₹1.01-lakh crore on food subsidy.

NSSF borrowings


To make good the difference between the actual amount required for food subsidies and the amount released by the Centre, the FCI has been borrowing from the National Small Savings Fund (NSSF).

In the first year of its borrowing from the NSSF in 2016-17, the FCI’s loan was ₹70,000 crore.

This, increased to ₹1.21-lakh crore in 2017-18 and ₹1.91 lakh crore in 2018-19.

In 2019-20, too, the pressure seems to have continued on the Corporation. In December 2019, the FCI raised ₹8,000 crore through issue of bonds on a private placement basis on BSE.

The updated numbers for the FCI’s borrowing from the NSSF this year may come only by March.

The Centre will have to, at some point, pay its dues to the FCI, for the Corporation to repay the NSSF; the FCI doesn’t have an income stream of its own.

The NSSF is where millions of salaried and middle-class people have their lifetime savings.

If the Centre continues to plunge into this fund for fiscal-deficit financing, it doesn’t speak well of the government.

Looking at the 2017 CAG report on the FCI, it appears that the subsidies received by the Corporation have been lower than the actuals, in the past, too.

Between 2011 and 2016, on an average, only 67 per cent of the subsidies claimed was released by the Centre, according to the report.

Published on January 25, 2020

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