Fiscal deficit shows the extent to which the government cannot fund the budget through internal sources. That has to be bridged by borrowing and it is a key barometer of the overall health of the economy. As the NDA government prepares to present its last budget before the 2019 elections, the big focus will be on the fiscal deficit and how much it deviates from the fiscal targets.
FRBM; where is the discipline
When P Chidambaram was the finance minister, he had introduced the FRBM Act which called for announcing and respecting fiscal deficit targets each year. The previous UPA government also slipped on fiscal targets towards the end of its tenure and the current government is also likely to do the same. The original target for fiscal deficit for the full year was targeted at 3.3% of GDP. That target has already been hit by the end of October itself. Disinvestment revenues are likely to fall short by nearly Rs.20,000 crore. That is likely to push fiscal deficit closer to the 3.5% mark. Then there is the big disappointment that is expected on the GST front. According to early estimates, GST for the year is expected to fall short by at least Rs.1 trillion. While there has been some growth visible on direct tax collections it is going to be grossly insufficient to cover this shortfall. We have not even looked at spending. Merely the shortfall in revenues could take fiscal deficit closer to 4% of GDP.
The government has by now realized that MSP announcements and farm loan waivers are not really improving the lot of farmers. That is because MSP is hard to implement and farm loan waivers typically benefit landed farmers only. One option could be the Telangana model which does a direct cash transfer of Rs.4000 per acre per season to the farmers. This has been extremely useful in alleviating the condition of the farmers. Jharkhand and Odisha are adopting this model and the centre too may follow suit. This direct transfer alone is likely to cost nearly $10 billion and the overall farm rescue package is likely to be closer to $35 billion. It may be announced in the Union Budget and could put severe pressure on the government finances.
Off balance sheet items
A lot of government debt is hidden in the books of the Food Corporation and NHAI. Estimates show that this off balance sheet deficit has already gone up from 0.4% to 2.3% in the last 5 years. That more than neutralizes the fall in the fiscal deficit. Rating agencies always look at the total deficit including off balance sheet items and this will not go down well with the rating agencies. Watch out for fiscal deficit numbers and the commentary. That could be the big macro parameter that the government will have to contend with in 2019. ©