Budget 2020: Jump in fiscal deficit does not suggest expansionary policy, says DEA Secy

By: and |
Published: February 3, 2020 5:57:42 AM

Budget 2020 India: The FY20 budget targeted fiscal deficit at 3.3% for this fiscal and 3% for FY21.

Budget 2020 India, Budget 2020-21Budget 2020-21: The government has projected an 18% hike in its capital expenditure for the next fiscal, compared with 13.4% in FY20

Budget 2020 India: The substantial 50-basis point jump in the Centre’s fiscal deficit for this fiscal as well as the next from the targeted levels doesn’t suggest an ‘expansionary fiscal policy’, as the breach was caused mainly by a low tax buoyancy at a time when the government had to elevate capital spending and provide enough funds for welfare programmes in a bid to spur economic activity, economic affairs secretary Atanu Chakraborty said on Sunday.

In an interview to FE, Chakraborty also said the Centre was mulling some reforms to align the interest rates on small savings instruments to market rates, hinting at a possible reduction in the rates of various such schemes in the coming quarters. He also argued that the borrowings by entities such as Food Corporation of India (FCI) can’t be termed as extra budgetary resources (EBR), as the funds so raised are used to purchase grains which can be sold.

He also indicated that the fresh fiscal deficit slippage is unlikely to cause any irrational spike in the already-elevated inflation, as higher spending is being used to create growth-inducing productive assets.
The government has projected an 18% hike in its capital expenditure for the next fiscal, compared with 13.4% in FY20, but it has also bridled the pace of its revenue spending. Revenue expenditure is budgeted to rise only 11.9% in FY21 to Rs 26.3 lakh crore, against the revised estimate (RE) of 17% for the current fiscal.

In the current fiscal, the government spending to prop up faltering growth has taken a toll on the Centre’s stock of debt as well as fiscal rigour, forcing it to invoke an escape clause provided in the FRBM rule to inflate fiscal deficit by 50 bps for this financial year and the next to 3.8% and 3.5% of GDP, respectively. A collapse in nominal economic growth in FY20 to 7.8% (on a revised base), a 17-year low, has also contributed to higher fiscal deficit. The FY20 budget targeted fiscal deficit at 3.3% for this fiscal and 3% for FY21.

However, if the revenue-strapped government’s off -budget mop-ups of Rs 1.73 lakh crore and Rs 1.86 lakh crore —which typically mask its actual fiscal hole — to fund expenditure are factored in, the deficit would zoom to 4.6% of the GDP for this fiscal and 4.4% in FY21, respectively.

“The tax buoyancy which comes out of investment push will not happen very quickly. That gap has to be filled in by some additional government funding, which could not have been possibly done by 3.3% or 3% fiscal deficit,” the official said. The tax buoyancy is estimated to be at a decade’s low of 0.5 and projected to improve to an optimistic 1.2% next fiscal. With net tax receipts have been revised downward by Rs 1.44 lakh crore in FY20, the Centre compressed revenue expenditure by Rs 98,000 crore in RE while it allocated an additional Rs 10,338 crore for capex this fiscal year. The government’s next tax receipts growth of 14.2% (down from 25.2% in BE) in FY20 also looks very optimistic as the tax receipts have declined by 3.3% y-o-y in April December 2019.

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Responding to 15th Finance Commission’s suggestion that the Centre’s should clean its balance sheet by gradually eliminating off-budget financing, Chakraborty said EBRs fully serviced by the Centre were not some thing that would continue perpetually. CPSEs, most of which by the FCI, would borrow Rs 1.28 lakh crore in FY20 and another Rs 1.37 lakh crore in FY21.

Former finance secretary Subhash Chandra Garg recently wrote that the system of small savings should be wind down in five years as the government has failed to enforce its policy of aligning small savings rates to the market interest rates on similar instruments. Banks are unable to compete with these rates but can’t bring down their rates for transmitting the monetary policy signals as they would lose out the savings completely.

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