Govt Breaches Fiscal Deficit In 8 Months; Expenditure More Than Revenue By 112% Of Target

The Logical Indian Crew

January 4th, 2018

Fiscal Deficit

Courtesy: The Indian Express, Business Standard | Image Credit: Jagaran, Business Standard

The Indian government breached its fiscal deficit for 2017-18 in November itself – a month when the government’s fiscal deficit was more than 2017-18’s entire estimate. During the April-November period, the fiscal deficit was 112% of the government’s Rs 5.5 lakh crore target for the current fiscal year.

This is the highest deviation from the Budget Estimates (BE) for fiscal deficit in the first eight months of a financial year since 2008-09.


What is fiscal deficit?

Fiscal deficit is the difference between total revenue and total expenditure of the government. It is an indication of the total borrowings needed by the government. A fiscal deficit is usually financed through borrowing from the RBI or raising money from capital markets by using instruments like government bonds, treasury bills, etc.


Why has the government breached its fiscal deficit target in 8 months?

The breach in fiscal deficit target comes on the backdrop of the Goods and Services (GST) tax collection for November 2017 which declined to Rs Rs 80,808 (as on December 2017). In October GST collections were Rs 83,346, which was still lower than the Rs 91,000 crore per month target. Other factors that caused the deficit to rise are lower non-tax revenues such as transfer of money by the central bank and higher expenditure.

To meet the current year’s target, the government had announced plans to borrow additional Rs 50,000 crore but this will not change the budget estimate as the government will cut down on outstanding treasury bills (short-term debt borrowing instruments up to one year). However, observers have expressed concerns with this move as the government’s revenue deficit has also crossed its target – 152% of the Rs 3.2 lakh crore target for the whole year. Comparing this to the same period last year, the government’s fiscal deficit stood at 85.8% of the budget estimate and its revenue deficit stood at 98% of the target.

After 2008-09, the year of global financial crisis, this is the first time that the fiscal deficit during the period of April-November has crossed 100%. But the situation will most likely not hurt the country’s GDP as badly as it did that time.


Can government cope?

To cope with the current fiscal deficit, the government needs to have a financial surplus in the next four months combined if it wishes to meet its target.

A way for the government to cope with the deficit is to improve GST collections in January-March 2018 and reduce government expenditure by curbing capital outlay (money spent on capital assets) and lending. However, this would have a negative effect on investment.

“Moreover, revenue expenditure will have to stagnate in December-March to avoid exceeding the Budget Estimate. The pace of growth of direct tax collections would need to improve to 21% in the remaining four months of this fiscal year from 14% in April-November, which appears unlikely,” said Aditi Nayar, principal economist with ICRA, reported Business Standard.

One aspect that brings hope is direct tax collections that the government announced in Parliament last week. It stands at 67% of its target for the current financial year.

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