The Indian economy failed to meet it’s fiscal deficit target of 3.2%. However, the revised fiscal deficit target of 3.5% of the GDP was met for the financial year 2017-18.
Fiscal deficit occurs when Centre’s expenditure exceeds the revenue generated(except borrowings).
While some economists like Keynes saw fiscal deficit in a positive light and believed that it helps an economy grow out of a recession, most others believe that governments should avoid deficit in favour of a balanced budget.
For FY18, Centre’s total income was estimated at Rs 16.23 Lakh Crores and the total expenditure was around Rs 22.17 Lakh Crores. This shortfall of Rs 5.94 Lakh Crores, when expressed as a percentage of the nominal GDP, shows the fiscal deficit. Since the gaps are already so large and the amount so huge, every minor change in the numbers, be it a 0.3%, is very keenly watched.
The slightest changes matter because the Centre fills this gap in it’s budget through market borrowings.
At the end of March 2018, the mountain of outstanding loans of the government( a cumulation of several borrowings due to deficits in the past years) amounted to an estimated Rs 82.32 Lakh Crores.
While we always blame governments for under allocation of funds for welfare schemes and development of new assets, the Centre actually gets to allocate a very limited amount from it’s expenditure.
The reality is that most of the money is spent on 3 recurring expenditures: interest payments, pensions and subsidies. In FY18, interest payments amounted to an estimated Rs. 5.3 Lakh Crores, i.e. 32% of the Centre’s income.
Hence, it is very important for the government to clear up it’s finances first, and that will be possible only when the deficits decrease.
The fiscal deficit has declined from a 4.5% to a 3.5% in the past four years. Government’s borrowings have also decreased. In FY14, nearly 32% of the budget expenditure was made by borrowing. In FY18, the borrowing has been reduced to 27%.
The throne of the Centre is placed on a very fragile mountain created out of borrowings. If the country needs to prevent itself from the vicious circle of borrowings and interest payments, fiscal consolidation is a must.
While most of us blame governments without knowing the facts, this government has done a good job as far as fiscal consolidation is concerned and must continue it.
Picture courtsey:The Indian Economy
Union Minister of Finance, Mr. Piyush Goyal has said that the government will achieve it’s targeted 3.3% fiscal deficit for FY19, although it is an election year. He added that the government will not compromise on good governance, since it has alternative sources of income for planned expenditure. He thanked the federal structure for cooperating, to ensure the success of the GST mechanism.