In the last 60 years, governments often stayed away from making populist announcements in their final budget and had tried to hold on to their fiscal math. However, this year around the Narendra Modi government races with time to finish the five-year term on an eventful note, and dotted with landmark achievements.
Arun Jaitley, the former finance minister had himself indicated that conventions will be defied this time “in larger interest” of the economy and for the sake of tackling “challenges” that cannot wait. He had also explained that a “deviation” from conventions is possible “only if extraordinary circumstances exist”, which the government believes to exist, after continued protests by farmers and after its electoral defeat in the Hindi heartland states.
In 2014, when Jaitley took over as finance minister, keeping up to the fiscal deficit target came across as his first challenge. His predecessor P. Chidambaram, the UPA finance minister, had set a target of bringing down fiscal deficit from a high of 5.7 per cent of GDP in 2012-13 to 4.1 per cent by 2014-15. Interestingly, it was Jaitley's measures to stick to the fiscal prudence (fiscal deficit was 3.9 per cent of GDP in 2015), which had earned India an upgrade in Moody's investor ratings.
The ratings, given for government-issued bonds, impact their saleability and provides it with additional credit, over and above the revenue collections. This ratings upgrade removed Indian government bonds from the junk status it was assigned the previous year, to the lowest investment grade. Since then, Jaitley had promised to keep fiscal deficit targets to reduce progressively every year to 3 per cent of GDP by the end of 2017-18.
Earlier in 2014, the slack in oil prices had helped the government to bring down fiscal deficit immensely. But subsequently, as oil prices started to harden, and the government launched a number of schemes targeting the poor, the fiscal math has been a challenging task for the government to keep up with.
During the 2015-16 budget, Jaitley said that the new fiscal consolidation roadmap of the government would be 3.9 per cent of GDP in 2015-16, 3.5 per cent in 2016-17 and 3 per cent by 2017-18. Till 2016-17, Jaitley was able to meet his target and consolidated government borrowings to 3.5 per cent of GDP. However, in the same year, the finance ministry under Jaitley also viewed the fiscal deficit targets as 'rigid' and had set up a committee under N.K. Singh, to review the Fiscal Responsibility and Budget Management (FRBM) Act rules under which the fiscal deficit targets are set.
While the government sought some maneuverability in the fiscal space, this committee recommended moving the 3 per cent fiscal deficit target to March 31, 2020, and then bringing it down to 2.8 per cent and 2.5 per cent by 2022-23. As expected thereafter, Jaitley had failed to meet the target of 3.2 per cent fiscal deficit for 2017-18 and overshot it to 3.53 per cent.
For 2018-19, Jaitley had set a target of 3.3 per cent, which in all likelihood would also be missed, when the final numbers are announced on the budget day by interim Finance Minister Piyush Goyal, who is also the railways minister.
The government had budgeted a fiscal deficit of Rs 6.24 lakh crore, or 3.3 per cent of the GDP, for 2018-19. At the end of November this year, and with four months away from the close of the year, fiscal deficit already stood at Rs 7.16 lakh crore, or 114.8 per cent of the full-year budget, data from the ministry of statistics and programme implementation showed.
While it is evident that the government in all likelihood would miss the 3.3 per cent target, the larger question on everyone's mind now is that by how much can it miss this target.
Among the main concerns are that the government’s own revenue receipts had taken a hit owing to lower than estimated collections from GST. For direct tax, the government had already hiked investment limits and allowed certain tax breaks to industries and to individuals after demonetisation, leading to lower than expected tax collection.
“It can be expected that the government will end this year with a fiscal deficit of 3.7 per cent and would move the target for 2018-19 to 3.5 per cent,” said brokerage firm Bank of America Merrill Lynch, in a recently issued investment note.
At the February 1 budget, the final one before the general elections, the government will try to address rural distress by interest subvention/direct income transfers supporting consumption over investment, it said.
“The budget should ideally not propose any new direct taxes, and the finance minister should take steps to alleviate stress in the hinterlands,” it said. The brokerage firm estimates support of Rs 30,000 crore to be earmarked in the budget towards interest subvention, by way of waiving the 4 per cent interest paid by those farmers repaying on time, and also a Rs 70,000 crore commitment as income support to farmers.
Earlier, SBI Capital in a report had suggested that any income support scheme announced by the government for landed farmers, is estimated to cost an estimated Rs 1 - Rs 1.2 lakh crore. A number of other brokerage firms and banks also estimates the current year fiscal deficit to be between 3.5 per cent to 3.7 per cent. Anything more than this and the markets may find it amid another exodus of foreign portfolio investors—who are the largest chunk of investors across Indian bourses.
“The disinvestment process generated only Rs 14,000 crore against the government’s target of achieving Rs 84,000 crore in disinvestment of government assets this year. Also, other sources of revenue like dividends received from the RBI and other PSUs have come down from their 2015 numbers. These factors may leave little scope to hike allocations for various ministries and the ongoing schemes,” said Professor N.R. Bhanumurthy, associate professor at National Institute of Public Finance and Policy, a finance ministry supported think tank and research institute.
Given this scenario, if the Modi government could still jump to rescue the debt-ridden Indian farmers and banks, and the extent to which it is able to contain this crisis now remains to be seen at the interim budget.
