Garg said small savings schemes should be discontinued since they disrupted monetary policy transmission.
Former finance secretary Subhash Chandra Garg on Wednesday flagged huge under-reporting of the fiscal deficit, pegging it at 4.5-5% of GDP for FY20, including off-budget expenditure. Factoring in off-budget expenditures including for bank recapitalisation, food subsidies, irrigation schemes and sanitation schemes, Garg estimated actual fiscal deficit of the Centre at 4.4% in FY18 (reported 3.5%) and 4.7% in FY19 (3.4%). He estimates the deficit at 4.5-5% in FY20 — budget estimate 3.3%, which is likely to be revised to at least 3.5%. Garg sees a shortfall of Rs 2-2.5 lakh crore on revenue side in FY20 and off-budget financing at Rs 1.75-2.25 lakh crore.
Garg said small savings schemes should be discontinued since they disrupted monetary policy transmission. Writing on his blog, he criticised policies relating to fiscal deficit and debt management, saying less than 25% of the Centre’s annual borrowings is utilised for real capex as consumption expenditure is taking precedence. On the other hand, the headline general government (Centre and states) fiscal deficit of around 7% (FY18) is higher than the net financial savings of households (6.6%), forcing the private sector to look for funds overseas.
With the debt trajectory moving in the reverse direction, Garg said the fiscal deficit goal of 3% by FY21 is likely to be pushed to FY26 (to coincide with the new five yearly budgetary cycle with finance commission recommendations). The debt and liabilities goal of 40% is likely to be pushed to FY31 from FY25, he said.
“It would be more convincing if this fiscal deficit goal is defined to include all budgetary and off-budgetary liabilities (which currently are around 4.5% of GDP),” said Garg, who took voluntary retirement in October last year after he was transferred from a seemingly more powerful finance secretary to power secretary post.
If the government were to disclose and incorporate all its fiscal expenditures into the fiscal deficit and state the fiscal road map (0.25 to 0.3% reduction consistently every year) in the budget, the fiscal correction and consolidation would sound more credible, he said.
Besides running smaller fiscal deficit, the system of small savings should 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, Garg said. If tax incentives associated with such savings instruments are taken into account, the effective rates are 150% to 200% of the instruments of similar nature, he said.
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, the former finance secretary said.