India Economy

Don’t forget the revenue deficit

TCA SHARAD RAGHAVAN | Updated on March 10, 2018 Published on December 17, 2017

Revenue deficit slippage has consequences for capital expenditure

Recently, there has been a lot of buzz around the fiscal deficit and whether the government will meet its target or not. Ratings agencies such as Moody’s and S&P, in deciding what rating to assign to a country, place a lot of importance on governments meeting these targets. Moody’s in November upgraded India’s rating, but S&P didn’t.

But why is the fiscal deficit target so important? As the difference between the total expenditure and the total revenue receipts (excluding borrowings) of the government, the fiscal deficit is, of course, a useful indicator. It gauges the spending limit of the government, how much it is exceeding it by and, by implication, how much it needs to borrow to bridge the gap.

That a developing and rapidly-growing economy such as India’s has a fiscal deficit is no surprise; one might argue it’s even healthy. But imposing strict targets for the deficit, such as the 3.5 per cent of GDP last year and the 3.2 per cent this year, is possibly not the best way to handle the situation. Strict targets penalise natural slippages.

Take this year, for example. Many economists have said that it is highly unlikely the government will meet its fiscal deficit target of 3.2 per cent of GDP. The reasons for this are almost entirely driven by the implementation of the Goods and Services Tax. The government has only a vague idea of the kind of revenue it can expect from GST. Delayed filing deadlines and easier compliance rules mean that the government can’t do invoice-matching, a key factor in computing the input tax credits to be paid out. So it doesn’t really know how much it stands to earn.

When a fiscal deficit is ok

If revenues are unclear, then so is the fiscal deficit. There also has been a lot of discussion on whether missing the target is actually such a bad thing. So what if there is a slippage? Moody’s has already said that it will not immediately downgrade India if there is a slippage. And noted economists have said that a slippage might actually be a good thing. For example, Pronab Sen, former Chief Statistician of India, in an interview to The Hindu recently, said that he would be okay with a slippage of the fiscal deficit of up to 0.5 per cent, if it was the result of expenditure being increased in the right manner.

“If the slippage is coming due to excess expenditure, then that’s a problem if and only if, the type of expenditure you have incurred doesn’t have the effect of boosting the informal sector, which is where the demonetisation and GST problems exist. If you are compensating for that problem by increasing public expenditure of that particular kind, like rural roads, low-cost housing, minor irrigation, then it’s not a problem,” Sen said.

Which leads us to another important point, that with all this talk of the fiscal deficit, another important economic measure is being forgotten — the revenue deficit. The revenue deficit is the difference between the revenue expenditure of the government and its total revenue receipts. The revenue expenditure of a government is what it spends on routine things like repairs and maintenance, as opposed to capital expenditure, which is the planned spending budgeted by the government on roads, housing, schools, and so on.

Ballooning expenditure

Recently, at the release of a UN report in Delhi, NIPFP professor NR Bhanumurthy raised a concern, saying nobody was keeping track of the government’s revenue deficit, and that a slippage on this account had more serious consequences for the economy. A slippage in the revenue deficit means that revenue expenditure is ballooning at the expense of capital expenditure — an unhealthy trend.

It’s still not clear if India will miss its fiscal deficit or revenue deficit targets, but it’s time equal emphasis was placed on both the deficits. The revenue deficit is at least as important, and the government would do well to remember that.

Published on December 17, 2017
This article is closed for comments.
Please Email the Editor