How recent FinMin tweets hint at higher fiscal deficit

The timing of a recent finance ministry statement and tweets referring to S&P's recent India rating has pointers to how fiscal deficit may pan out in the next Budget

It passed rather unnoticed this week that the finance ministry took it upon itself to announce that the credit rating agency S&P has reaffirmed India’s sovereign rating at BBB minus with a stable outlook. The timing of the statement and the alacrity of the government to release a sort of self-congratulation however has pointers to how the fiscal deficit may pan out in the Budget, due at the end of January 2020.

The statement was initially issued as a tweet by Atanu Chakraborty, secretary, department of economic affairs in the finance ministry, on December 3. It was later slightly expanded and issued as a press release by the ministry. It quoted the world’s largest credit rating agency as saying: “India’s economy continues to achieve impressive long term growth rates despite a recent deceleration. It is believed that the economic slowdown is cyclical rather than structural.”

The Narendra Modi government certainly needed this pat on its back, in the middle of a massive slowdown. Two days after the Tweet, the Reserve Bank of India has confirmed the bad news, pegging India’s GDP growth rate for this financial year at 5 per cent in its fifth bi-monthly monetary policy review. In April this year, it had estimated the GDP will grow by 7.2 per cent in FY20. A 220 basis point climb back in the estimate for GDP within the same year is something RBI has not done for decades – not even in 2008.

So there is enough reason for the government to have wanted a congratulatory pat. But despite the reasons, it is churlish to expect the government to have also coaxed this statement out just to spread Yuletide cheer. There are stronger reasons.

Those reasons have to do with the size of the fiscal deficit. There are already enough indicators that the deficit will be much larger than the budget estimates. The first among those is the award of the 15th Finance Commission. Whatever the additional sum it offers the states, it will stretch the finances of the Centre. Then, there is the correction to be made for the massive overestimation of the tax revenue in the budget estimate. The gap between the actuals and the budget estimate could turn out to be close to Rs 3 lakh crore. And, there is the little matter of off-budget borrowings that has been flagged by even the Comptroller and Auditor General. At this stage, we assume that the disinvestment receipts of Rs 1,05,000 crore will be realised. To the extent there is a shortfall, there will be additional pressure on the fiscal deficit numbers.

What is the importance of the fiscal deficit to the public? It shows how much additional borrowing FM Nirmala Sitharaman would have to make in this financial year and the next to pay the government bills. These borrowings obviously have a cost. This cost rises not only as the size of the borrowings expand, making the total interest payable larger, the rate of interest on per rupee of borrowing also rises. Both raise the costs.

The finance ministry tweet, therefore, makes it explicit that the finance minister will miss the fiscal deficit target for 2019-20 of 3.3 per cent by a big margin. She will not stick to a conservative estimate – as she and her predecessor, Late Arun Jaitley, had done – even though it is clear that the economy now desperately needs the government to spend more.

Chakraborty’s tweets are therefore an insurance against higher fiscal deficit numbers. Because once those are out, he would have faced flak from the markets, if after taking a look at the government numbers, agencies like S&P would have issued a harsh commentary. Not only does larger borrowing create more costs, a negative appraisal by a rating agency of the borrowing, adds to those costs.
Such a development would stand to unnerve debt markets and send the yields on India government securities soaring (lowering the price of the securities). This would have imposed a loss on the holders of the India government papers. It would have also made the subsequent issue of GOI papers much more difficult. The next lot of disinvestment would become far more difficult. And since states too have begun to tap global markets, their borrowing costs would have also risen.

A toned-down commentary now has achieved a dual purpose. It has given a space for the finance ministry to show a realistic but painful fiscal deficit in the budget. It also creates some optimism that some of the deficit would be used to ratchet up government expenditure, which has become essential to revive investments in the economy. After having issued a qualified vote in favour of medium-term trends for the Indian economy, the rating agencies which usually are uncomfortable with fiscal slippages, would have problems castigating Sitharaman’s budget numbers.

The reaffirmation of the outlook for the Indian economy by S&P is therefore of vital importance for India. Hence the surprising self-congratulatory tweets by the finance ministry.

(The writer is a business journalist and can be reached at [e-mail])

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH