Fiscal deficit is likely to double this financial year, but that is not the most frightening fact. If forecasts are to be believed, the Centre’s deficit may remain elevated at about 5.5 per cent of GDP next fiscal. And if you consider states’ components, given the need for higher spending, the general government deficit could settle at 8.5 per cent in FY22 — a level last seen prior to the 1991 economic reforms phase.
Worryingly, the Centre’s FY21 deficit anticipated at 7-7.5 per cent of GDP will also be the highest reported figure in over three decades. The last time the deficit breached the 6.5 per cent mark was during the global financial crisis in FY10. Prior to this, there have been periods of macroeconomic instability invariably been pre-dated by fiscal adventurism.
For instance, the general deficit widened to 8.6 per cent during 1984-85 and breached the 9 per cent threshold in the ensuing years. During the 1990s, it rose sharply to over 10 per cent forcing the government to introduce the FRBM Act in 2000, which was eventually enacted into a law in 2003.
There was no massive fiscal stimulus in 2020, still, the significant shortfall in total receipts is likely to double the deficit to over 7 per cent of GDP this fiscal from the budgeted 3.5 per cent.
Additionally, state governments were permitted to raise additional borrowings to tide over the revenue crunch in FY21, implying that the general government deficit could print at 12.2 per cent of GDP — the highest levels recorded in the past several decades.
But much before the pandemic began aggravating the situation, owing to economic slowdown, the government had already invoked the ‘escape clause’ in FY20 itself. Analysts expect the Finance Minister to present a clear and reasonable glide path for fiscal consolidation next week. As per the revised budget estimates, FY20 deficit touched 3.8 per cent of GDP as against the target of 3.3 per cent.
Subsequently, it expected the deficit to decline to 3.5 per cent in FY21, and 3.3 per cent in FY22.
The good news, however, is that the government appears keen on adhering to deficit targets. Moreover, given the lack of receipts and forced higher spending, experts aren’t ruling out a one-off cess/surcharge
to make up for the revenue loss.
Plus, the 15th Finance Commission’s recommendations on revenue sharing and deficit targets, the borrowing permission to be granted by the government and the extent of improvement that can be realised in states’ own tax revenue, will guide state fiscal trends in FY22.