Is it a worry that the fiscal deficit has blown up sharply in this current financial year?

There are two sides to the Indian economy story. On the one hand the current account surplus showed that India was finally earning more from international transactions than it was spending. However, the bigger worry is on the burgeoning fiscal deficit.

Let us quickly look at what is this concept of fiscal deficit. Fiscal deficit is the budget gap that has to be bridged via borrowings, which is why you need to be cautious about it. The fiscal deficit for Apr-Aug period touched 109% of full year target and that is not a good sign.

In the Budget 2020, Nirmala Sitharaman had hiked the fiscal deficit target from 3% to 3.5%, but now even that looks impractical. ICRA and CARE have pegged fiscal deficit for FY21 at above 7.5% or more than twice the budget target.

Remember that in rupee terms, the full-year fiscal deficit target is Rs.792,000 crore and India has breached Rs.870,000 crore in just five months. Even assuming that revenues will be substantially back-ended, you may still end up with huge fiscal deficit this year.

It is OK for richer countries to talk about pump priming but India cannot breach fiscal deficit targets due to its low capita income levels. Higher fiscal deficit means higher bond yields, higher borrowing costs and private players will not get to access funds in the market.

That is not good news for a potential GDP recovery that all of us have been praying for. There is something more interesting on this front. GOI enhanced its full-year borrowing target back in May from Rs.7.80 trillion to Rs.12 trillion. That still stays, which is surprising.

What it means is that India will require a very huge push to disinvestments, including LIC and BPCL. The worry is that a high fiscal deficit could very well negate all the good things that we have seen on the current account surplus front. That must be avoided.