RSTV- The Big Picture : Is India’s Fiscal Deficit Manageable?

  • IASbaba
  • December 11, 2017
  • 1
The Big Picture- RSTV
Print Friendly, PDF & Email

Is India’s Fiscal Deficit Manageable?

Archives

TOPIC: General Studies 3

  • Indian Economy and issues relating to planning, mobilization of resources
  • Inclusive growth and issues arising from it.

Background

In the first six months of the current financial year, the fiscal deficit touched 91.3% of the full year budget estimate as compared to 83.9% in the same fiscal previous year.

The deficit reflects the excess of expenditure over revenues at 4.99 lakh crore rupees in absolute terms. There are concerns about whether the government will be able to stick to target of reducing fiscal deficit to 3.2% by march 2018. The data revealed that total expenditure during april-september was 11.49 lakh crore rupees at 53.5% of entire fiscal’s estimate. Revenue deficit during the period was over 3.8 lakh crore rupees at 92% of estimate.

Hence there is a challenge to balance between growth aspirations vs. fiscal health

The green shoots

  • The spending plan is getting more streamlined with early budget. The budget for fiscal year 2017-18 was passed earlier so there is front loading of expenditure and thus the 80-90% target of expenditure is not alarming. Also, it is an observation that the revenue mobilisation comes towards the latter part of the year when money comes in. Thus managing of fiscal might not be a major concern for the government.
  • The recapitalisation done by not putting it on draft budget but doing it as recapitalisation bonds which will be actually borne by the banks and only small amount of interest burden will be charged is a welcome step to manage the fiscal.
  • The companies are showing improvement in their performances. This means they will be making larger allocation for income tax hence increasing the revenue. The GST numbers may not be exceeding expectations, but are also not underperforming massively. So there is a comfort for central government.
  • A large amount of expenditure is now incurred by the state governments so there is no added burden on central government for expenditure.
  • There are no sever natural calamities asking for central government assistance.
  • Good monsoon in most part of country.

Possible challenges to fiscal deficit management

  • Warning signal is the hardening of the oil prices. This can have a big effect for the oil subsidy importance and the impact it has on budget. But as it is not in government’s control, it cannot be much worried about for.
  • The worry is non-tax revenue- the disinvestment after 8 years was expected to give significant income but it does not seem to be a case now. Also, the RBI dividend is not as expected. So that is gap the government will need to make up.
  • Additional spending on MGNREGS to create rural jobs.

Making economy grow

  • The priority of government should be to stimulate investments in household sectors. In the past 5 years, the corporate sector investment shares as part of GDP has remained around 11%. The public sector investment has also remained around 7% of GDP. The big drop is in household investment from 15% five years ago to 10% in 2017. This needs attention, as this is the area where lot of job generation takes place and demand generation is also there.
  • There is a need to focus on stimulating the economy by giving more attention to SMEs and not focus much on fiscal deficit.
  • Focus should be on proper GST implementation. The impact of GST has not been high as far as fiscal health is concerned. The ease of doing business report shows that a predictable and a stable system gives the country better market than the country which has good intentions but keeps on changing goal posts. GST will take time to be adjusted smoothly for it is a radical change.
  • The household savings also needs to be improved.
  • No more bail outs The stimulus package for the farmers was announced earlier by few states and then central government SIPs should be encouraged. announced the economy stimulus. So now is the time for to do away with these and let proper investments and development take place.
  • Domestic investment has not picked up in last few quarters. It will start picking up only when industry starts seeing demand growth. Just asking them to invest more is not going to work. Proper environment has to be created to let them flourish.
  • The real estate sector is one of the major areas of the problem. The problem of home buyers was not sufficiently addressed. Lot of people who had put money in the house, find that their money is gone as under the insolvency law, they are unsecured creditors. Their concerns should be addressed as real estate sector provides major construction jobs. Along with it, construction of roads, building highways should be focused upon.

Way forward

The NK Singh committee had suggested a new fiscal consolidation focus on government debt rather than the fiscal deficit. It suggested a total government debt of 60% of GDP by FY23 and provided fiscal goalposts to attain this target. The government has met budget targets in the last three years, which has helped establish budget credibility. Though there had been concerns over the fiscal deficit running ahead of the trend halfway through the year, the government is keen to manage the growth stimulus with fiscal consolidation.

Connecting the dots:

  • Fiscal consolidation is the key to fiscal deficit management. Discuss.

For a dedicated peer group, Motivation & Quick updates, Join our official telegram channel – https://t.me/IASbabaOfficialAccount

Subscribe to our YouTube Channel HERE to watch Explainer Videos, Strategy Sessions, Toppers Talks & many more…

Search now.....

Sign Up To Receive Regular Updates