NEW DELHI: The government on Monday pegged the fiscal deficit for the current financial year at 9.5%, higher than what analysts have predicted as it increased spending, sidestepping the concerns over the impact on the sovereign rating by taking fiscal expansionary stance.
The government had set a target of 3.5 per cent fiscal deficit in the current year. However, prolonged lockdown, steep rise in expenditure and dip in revenue collection resulted in fiscal deficit widening to 9.5% of the GDP.
The Centre’s revised estimate for expenditure during 2020-21 rose to Rs 34.50 lakh crore from the original Budget Estimate (BE) of Rs 30.42 lakh crore. For the next financial year (2021-22), Finance Minister Nirmala Sitharaman has pegged fiscal deficit at 6.8 per cent of GDP and then has set a glide path, with a target of bringing it down to a 4.5 per cent deficit by 2025-26.
Defending the “bold” fiscal stance, Finance Minister said that the government had focus on spending and said the government had made brave decision to make government account open and transparent.
“Our fiscal deficit, which started at 3.5 per cent during February 2020, has gone to 9.5 per cent of GDP. So, we have spent, we have spent, and we have spent. At the same time we have given a clear glide path for fiscal deficit management. We have made brave decision to make government account open and transparent,” Sitharaman said.
The welcome move was the government discontinuing the practice of financing food subsidy via loan from National Social Security Fund.
This move pushed the fiscal deficit of the government up by at least Rs 2 lakh crore to Rs 18.49 lakh crore, putting an end to the practice of cleverly window dressing subsidy bills in last few budgets.
The higher than deficit numbers will necessitate changes to the Fiscal Responsibility and Budget Management Act.
The FRBM Act mandates a fiscal deficit of 3 per cent of GDP that needs to be achieved by March 31, 2020-2021.
The fact that the chief economic advisor dedicated a whole chapter on the bias of sovereign rating agencies, the bold fiscal deficit position of the finance minister just showed that the government is ready to put aside concerns over rating downgrade.In times like these, high fiscal deficit is not unique to India.
China’s deficit is projected to rise to 11.8 per cent for 2020 and 11 per cent for 2021, according to International Monetary Fund data.
However, some concerns were also raised regarding the numbers.
“Since higher spending will be funded by higher borrowing which has the potential to create an upward pressure on inflation and interest rates a few months down the line. We believe that the RBI will be in sync with the government and both will take necessary action to prevent this,” said Dhiraj Relli of HDFC Securities.
Target of 4.5% by 2026
The Centre is targeting a fiscal deficit of 6.8 per cent of GDP for FY22, which will gradually come down to below 4.5 per cent by FY26. This will need amendments to the Fiscal Responsibility and Budget Management Act