The first three months of the fiscal year 2020-21, from April to June, saw India’s central government facing a fiscal deficit of Rs. 6.62 lakh crore, according to official data. This figure represents 83% of the budgeted target for the year, which stands at Rs. 7.96 lakh crore. Economists are predicting that the fiscal deficit could peak as high as 8% of the Gross Domestic Product (GDP), overshooting the budget’s aspiration of 3.5%.
The Decline in Income Component
From April to June 2020, the Union government acquired Rs. 1.53 lakh crore via ways such as tax, non-tax revenue and loan recoveries. This is less than 7% of the budget estimates for the entire fiscal year. Owing to the pandemic and subsequent lockdowns halting economic activity, it was expected that government revenues would also experience a downturn. Another factor contributing to the decline was the transfer of Rs. 1.34 lakh crore to States as their share of taxes – Rs. 14,588 crore lower than the previous year.
Increase in Expenditure
During the same three-month period, the Centre’s total expenditure reached Rs. 8.15 lakh crore, nearly 27% of the budget estimates for the current fiscal year. The increase in spending can be attributed to initiatives designed to support millions of migrant workers, such as free food grants and rural job programmes. Capital expenditure in the first quarter experienced a 40% growth spike to Rs. 88,273 crore, setting a historical record over the last two decades for year-on-year percentage growth for the first quarter. Increased capital expenditure equates to increased spending on the creation of assets, such as infrastructure.
Rise in Borrowings
Given the reduced collections, the government has been forced to elevate its borrowings for the current fiscal year to a record Rs. 12 lakh crore from the previously estimated Rs. 7.8 lakh crore in order to meet spending requirements.
Understanding Fiscal Deficit
The government defines India’s fiscal deficit as “the excess of total disbursements from the Consolidated Fund of India, excluding debt repayment, over total receipts into the Fund (excluding the debt receipts) during a financial year.” Simplified, it is the difference between the government’s income and spending. A fiscal deficit indicates that the government is spending more than it earns.
The fiscal deficit is calculated as a percentage of Gross Domestic Product (GDP), or as the surplus money spent over income. In both cases, the income figure pertains only to taxes and other revenues, excluding borrowed money used to bridge the gap.
Expenditure Component
In its Budget, the government sets funds aside for various purposes, such as salary payments, pensions (revenue expenditure), and asset creation like infrastructure and developmental projects (capital expenditure).
Income Component
The income component comprises two parts: revenue generated from taxes imposed by the Centre, and income earned from non-tax sources. Tax revenue is collected from corporation tax, income tax, Customs duties, excise duties, GST, among others. Non-taxable income includes external grants, interest receipts, dividends and profits, and receipts from Union Territories.
Addressing Fiscal Deficit
The government seeks to counterbalance the fiscal deficit by borrowing money. This means that the total borrowing needs of the government each financial year are identical to the fiscal deficit in that particular year. While high fiscal deficit is generally seen as a concern, it can be beneficial if the borrowed money is invested in the creation of productive assets like highways, roads, ports, and airports that stimulate economic growth and job creation.
Regulating Fiscal Deficit
The Fiscal Responsibility and Budget Management Act, 2003 mandates that the Centre should strive to limit the fiscal deficit to 3% of the GDP by 31st March 2021. The NK Singh committee, established in 2016, suggested that the government aim for a fiscal deficit of 3% of the GDP in years leading up to March 31, 2020, and further reduce it to 2.8% in 2020-21 and to 2.5% by 2023.
The Way Forward
Due to the current economic contraction, the fiscal deficit is anticipated to surge this year. The primary focus at present should be on restoring confidence among consumers and businesses. This is likely to stimulate economic recovery.
