Get Even More Visitors To Your Blog, Upgrade To A Business Listing >>

Explained: India surpassing its fiscal deficit target at the end of November

By Priyanka Venkat

The hope that India’s Fiscal Deficit will remain within the government’s target this year weakened last week. The fiscal deficit for 2017-18 surpassed last year’s target by about 12% by the end of November. According to government data, the fiscal deficit for the period April-November was Rs 6.12 lakh crore, exceeding the target of Rs 5.47 lakh crore for 2017-18.

A fiscal deficit occurs when the total expenditure of the government exceeds its total revenue. The deviation from the fiscal deficit target for the first eight months of last year is the highest deviation to occur since 2008-09. In that year, at the time of the financial crisis, the fiscal deficit target was 2.5% of GDP. Yet, by the end of the first eight months, the fiscal deficit was more than 6% of GDP. Experts say that while the current situation is unfavourable, a repeat of 2008-09 is unlikely this year.

Why did this happen?

One of the main reasons behind the budgetary deviation is a fall in the amount collected from the goods and services tax. This may be partly due to the fact that the government slashed the rate of tax on close to 200 items in order to get the public on board. The amount of GST collected in November fell to Rs 80,808 crore, which was comparable to the Rs 83,346 crore that was collected in October.

There was also a fall in non-tax revenue. This includes transfers of surplus income by the central bank to the government and spectrum fees. The reserve bank transfers its surplus income to the government every year. Normally this plays a significant role in helping the government to reduce its borrowing requirements. Earlier this year, the amount of the transfer fell to Rs 30,659 crore, less than half of last year’s transfer of Rs 65,876 crore.

Why does the shortfall matter?

A common outcome of trying to reduce the deficit is a fall in government expenditure and a large fall in expenditure can impact growth and investment in the economy. Financing the deficit by borrowing can result in a higher demand for loans and may lead to a spike in interest rates. Moreover, large-scale borrowing by the government shrinks the amount of available private credit.

The central government recently announced that it would borrow an extra Rs 50,000 crore through the issue of dated securities. Dated government securities are those issued for a period of five years or more. While this is being done to help with the government’s revenue crunch, it could hamper the chances of meeting the year’s target. The government’s increased borrowing could push the fiscal deficit to as high as 3.54% of GDP next year, exceeding the 3.2% target.

Poor fiscal discipline could also harm India’s sovereign ratings internationally. Last month, Moody’s upgraded the country’s rating from Baa3 to Baa2. A fall in this rating in the future could reduce the confidence foreign investors have in the country’s economy lead to a further reduction of investment and credit availability.

Is a quick turnaround possible?

The possibility of meeting the fiscal deficit target now looks grim. Aditi Nayar, principal economist with the Investment Information and Credit Rating Agency (ICRA), has outlined what would now be required to meet the targets. “Given the front-loading in the early part of the year, capital outlay and net lending would have to contract by a sharp 15.4% in the last four months of this fiscal to avoid exceeding the budgeted estimate for FY2018… Moreover, revenue expenditure will have to stagnate on a year on year basis in December 2017-March 2018 to avoid exceeding the budgeted target.” According to experts, in order to meet the target, the government will need to generate a fiscal surplus in the remaining months of the fiscal year. This would be difficult to achieve and is quite unlikely. GST tax collections would also have to improve in the period between January and March.

Rising oil prices could also pose a challenge in this scenario. In 2017, the price of Brent crude oil increased to $66 per barrel, a 20% rise. According to estimates by brokerage firms, a rise in oil prices of $10 per barrel could have an adverse effect on the fiscal deficit of 0.1% GDP. This is because India imports close to 80% of its oil. Thus, a rise in oil prices would increase government spending on imports, making it hard to contain any fiscal deficit. Hence, a lot of things will need to work in the government’s favour if it is to meet or even come close to its deficit target, and this is looking increasingly unlikely.

Featured Image Source: Wikimedia

This post first appeared on The Indian Economist | For The Curious Mind, please read the originial post: here

Share the post

Explained: India surpassing its fiscal deficit target at the end of November


Subscribe to The Indian Economist | For The Curious Mind

Get updates delivered right to your inbox!

Thank you for your subscription