NEW DELHI: While market watchers are obsessed with the Centre’s 3.4 per cent fiscal deficit target, general deficit (Centre and states) emerged as an obedient child.
According to the Economic Survey 2018-19, the combined deficit will likely settle at 5.8 per cent of GDP in FY19 as against 6.4 per cent in FY18. This is a decade-low and the third lowest on record since the 1990s. The FRBM Act mandates a general deficit of 6 per cent by FY21, but that feat has been achieved three years ahead.
“Government has been able to contain fiscal deficit at 3.4 per cent of the GDP through compression of government expenditure. The entire reduction is in revenue expenditure,” the Survey noted.
However, the future isn’t all rosy. Challenges — ranging from apprehensions of growth slowdown affecting revenue collections, to US sanctions on oil prices, which has a direct bearing on petroleum subsidy and of course the CAD — could upset the fiscal applecart. Besides, the need for additional resources to fund government initiatives without compromising fiscal consolidation is crucial, while the 15th Finance Commission recommendations, especially on tax devolution, could strain government finances.
As on March 2019, the Centre’s liabilities stood in excess of Rs 84.7 lakh crore, of which 90 per cent comprised public debt.
The tenets of a good fiscal policy entail a fine balance between expenditure and revenue. For FY19, gross tax revenue was pegged to grow at 14 per cent, led by 17.3 per cent rise in indirect taxes and 14.4 per cent growth in direct taxes. But in the end, the government had to settle for less with direct taxes clocking 13.4 per cent increase; thanks to the heavy lifting by corporates, indirect taxes fell with a giant thud — witnessing a heartbreaking 16 per cent de-growth —largely due to dismal GST revenues. Consequently, gross tax revenue as a proportion of GDP fell by 0.3 per cent in FY19.
Widening tax base due to an increase in the number of indirect tax-filers under the GST regime led to improved tax buoyancy. Going forward, sustaining improvement in tax collection will depend on the revenue buoyancy of GST.
The good news though is, mindful spending has been the hallmark of the NDA government’s first term — simply because of lacklustre revenue collections — and as the Survey underscored, budgetary expenditure remained in considerable moderation throughout the past five-six years. For instance, in FY19, total expenditure fell by 0.3 per cent over FY18. While revenue expenditure fell 0.4 per cent, capital expenditure rose by 0.1 per cent. Within revenue expenditure, the axe fell on subsidies, improving the quality of expenditure.
Meanwhile, the Survey acknowledged that liquidity conditions remained systematically tight since September 2018 (read IL&FS crisis) and though the banks’ bad loans declined, credit growth remained subdued. However, financial flows to the economy remained constrained because of the decline in the amount of equity finance raised from capital markets and stress in the NBFC sector, it noted.