InvestorQ : Government has been letting fiscal deficit slip in the last two years. Does it really matter if fiscal deficit goes a little higher?
Chandralekha Desai made post

Government has been letting fiscal deficit slip in the last two years. Does it really matter if fiscal deficit goes a little higher?

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Mitali Bhutta answered.
2 years ago
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Fiscal Deficit represents the total borrowings that the government needs to do to meet its budgetary needs like health, education, infrastructure etc. Fiscal deficit will come down either if revenues from taxes go up or the spending comes down. There is nothing like the right fiscal deficit, although India adherers to the FRBM Act which sets fiscal deficit limits. Here are a few things you should know about the fiscal deficit.

· Last year, the government did increase its fiscal deficit target from 3.2% to 3.4% but finally managed to maintain that. That is surely no mean achievement.

· Revenues for the year have fallen short. For example, direct tax revenues were short by Rs.50,000 crore and GST collections fell short by Rs.100,000 crore. Even disinvestment revenues were managed through forced deals like ONGC taking over HPCL. Also a good amount of disinvestment happened through the CPSE ETFs and buybacks.

· There have been some concerns in the sense that the government has had to cut some of its spending targets to maintain the fiscal deficit within reach. Primary health and primary education have taken a hit and that is not exactly helpful in the long term

· There is another aspect of state fiscal deficit. Some items like Uday Bonds for power companies and the agriculture loan write offs are all routed through the state. The state fiscal deficit overall is as high as the central fiscal deficit. Apart from food subsidies, a lot of oil subsidies are also parked in the books of government organizations and not included in fiscal deficit.

A temporarily higher fiscal deficit is acceptable if the intention is to pump prime the economy. India has lower ratio of borrowings / GDP and so India can afford a higher fiscal deficit, once in a while. It must only be ensured that it does not go into unproductive avenues. In fact, the main reason governments are worried about fiscal deficit is that it has a negative impact on FPI flows into India and also for India’s external sovereign ratings. That is the reason, governments tend to be wary of fiscal deficit rising too much.

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