Why the fuss about fiscal deficit? -Aarati Krishnan

-The Hindu

The answer lies in the fragile state of the Centre’s finances, and its control over interest, pension and subsidy expenses

To any layman watching India’s annual Budget jamboree, the entire exercise must seem very puzzling. After the Finance Minister has read out a long list of giveaways to farmers, small businesses, low-income earners and senior citizens in his speech, none of the beneficiaries seems entirely happy with their gifts.

Commentators, after cursory compliments, quickly turn their attention to the deficit numbers. It is also quite difficult to comprehend why all hell must break loose, if the fiscal deficit turns out to be 3.5% for the year, instead of 3.2%.

All this fuss would be quite easily explained if only one were aware of the precarious state of government finances.

Think of India’s central government as one sprawling household with the Ministries, State governments and citizens making up its family members. If you took stock of this family’s finances, you’d at once conclude that this is one profligate household.

Expenses overshoot

In FY18, the Centre’s total income (as per the revised estimates) from taxes, non-tax revenues and capital items is estimated at ?16.23 lakh crore.

But it expects to incur a total expenditure of ?22.17 lakh crore. Expenditure will thus overshoot income by about 36.5%, leaving a shortfall of ?5.94 lakh crore.

This ?5.94 lakh crore shortfall is euphemistically termed as the fiscal deficit. When it is expressed as a percentage of India’s nominal GDP (?167 lakh crore as per latest CSO estimates), it appears modest at 3.5%. But this tells you why even a minor slippage in the fiscal deficit is so keenly watched. A 30-basis point overshoot in the deficit means a ?50,000 crore hole in the Budget.

The fiscal deficit in fact paints a more complimentary picture of government finances than necessary, because it counts both one-off receipts (from asset sales, recovery of loans etc) and recurring items (taxes) as part of the government’s ‘income’.

This mixing of capital and revenue items would be frowned upon in commercial accounting. Therefore, if one excludes capital items and takes stock of revenue items alone, the Centre is still spending more than it earns, with a revenue deficit of ?4.39 lakh crore in FY18 (revised estimates).

But the fiscal or revenue deficits for FY18 are by no means standout numbers. India’s fiscal deficit in the past ten years (based on actuals) has hovered between 3.5% and 6.4% of nominal GDP.

Please click here to read more.

The Hindu, 11 February, http://www.thehindu.com/business/Economy/why-the-fuss-about-fiscal-deficit/article22723770.ece?homepage=true

Related Articles


Write Comments

Your email address will not be published. Required fields are marked *


Video Archives


share on Facebook
Read Later