Fiscal deficit target goes for a toss

An offshoot of the economic crisis triggered by the pandemic is manifest in the Centre coming out with the ‘real’ state of its finances. In the Budget presented on February 1 by Finance Minister Nirmala Sitharaman, the revised estimate (RE) for fiscal deficit in 2020-21 is put at 9.5% of GDP. This is almost three times the budget estimate (BE) of 3.5%, which itself was 0.5% higher than the 3% threshold required by the Fiscal Responsibility and Budget Management (FRBM). It was justified by her as due to “far-reaching structural reforms with unanticipated fiscal implications.”

The slippage is not just due to a shortfall in tax collection and non-tax revenue, especially proceeds from disinvestment, but also due to inclusion in the Union’s balance sheet of the so-called deferred subsidy payments (DSP) -- euphemism for unpaid dues remaining on the books of central agencies implementing its welfare schemes.

For food subsidy, in Budget 2020-21, the BE was Rs 1.16 lakh crore; and another Rs 10,000 crore was given as supplementary grant, taking the total Rs 1.26 lakh crore. Against this, the requirement amounts to Rs 4.22 lakh crore. Under a business-as-usual scenario, the government would have asked the Food Corporation of India to borrow to make up for the shortfall. But RE for the year has been put at Rs 4.22 lakh crore, wiping out DSP under this head. This increases fiscal deficit by Rs 3 lakh crore.

In the case of fertiliser subsidy, BE for 2020-21was about Rs 71,000 crore, against requirement of Rs 1.34 lakh crore. In the normal course, fertiliser manufacturers would have been forced to borrow Rs 63,000 crore to make up for the shortfall. Here again, in RE, Sitharaman has provided for all of Rs 1.34 lakh crore, implying nil DSP under this head, too. Fiscal deficit rises by another Rs 63,000 crore. A truthful reflection of all expenses on food and fertiliser subsidy in the Budget alone has contributed to a rise in fiscal deficit by nearly 2%.

The Centre also asks the likes of National Highways Authority of India to incur capital expenditure on its behalf by borrowing, instead of providing budget support. Termed extra-budgetary resources (EBR), this, too, is used (in addition to DSP) to show lower fiscal deficit. If adjustment were made for EBR also, fiscal deficit for 2020-21 would have been higher than 9.5%.

If these so-called off-budget liabilities (OBL) were to be captured in the Union’s balance sheet, then the much-trumpeted compliance with the fiscal consolidation roadmap in the past is fiction. For instance, making adjustment for OBLs, the fiscal deficit for 2017-18 and 2018-19 would be about 5.9% and 5.7% respectively, against the reported 3.5% and 3.4%.

For 2021-22, when there is expected to be a V-shaped recovery and a nominal GDP growth of 15%, it is anomalous to target fiscal deficit at 6.8%. Although, there won’t be any DSP on food and fertilisers (at Rs 2.42 lakh crore and Rs 80,000 crore, BEs are adequate), this fiscal deficit figure does not capture EBR. If these are also reflected, fiscal deficit will be even higher.

Worse still, Sitharaman has also drastically relaxed the trajectory of fiscal consolidation for the next five years, targeting a fiscal deficit of 4.5% in 2025-26.

Even as the FRBM Act will be amended to ensure that the revised fiscal roadmap is within the ambit of law, it is abundantly clear that the Modi government has let loose the purse strings to a point whereby any talk of imposing fiscal discipline looks meaningless. Doing away with the practice of DSP is no consolation as this was a wrong that needed to be corrected anyway. Even so, window-dressing of accounts continues in the form of EBR.

True, the government intends to spend more and generate impulses for accelerating growth. This gets reflected in the BE for capital expenditure at Rs 5.54 lakh crore during 2021-22, which is 26% higher than RE for 2020-21 at Rs 4.39 lakh crore. But the fiscal cost of this is an excessive 6.8% -- more than double the earlier projection of 3.3%. There is an urgent need to spend more on building assets by re-directing funds from unproductive uses such as subsidies and tapping the full potential of tax and non-tax revenue. That will be fiscally prudent as well.