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Fiscal Deficit for the First Four Months of 2016-2017 is the Highest in Eight Years

Sep 6, 2016


At the end of every month the Controller General of Accounts (CGA) declares the fiscal deficit of the government, up until the previous month of the financial year. Fiscal deficit is the difference between what a government earns and what it spends.

Hence, as of August 31, 2016, the CGA declared the fiscal deficit number for the period April to July 2016. During the period the fiscal deficit of the central government was at Rs 3,93,487 crore. This was at 73.7 per cent of the annual target for the financial year and is the highest in eight years.

Fiscal deficit a percentage of annual target

Take a look at the above chart. It shows the fiscal deficit as a percentage of the annual target, for the first four months of the financial year, over a period last twelve years. It is clear that only in July 2007 and July 2008, was the fiscal deficit as a percentage of the annual target, at a higher level in comparison to where it is at during the course of this financial year. The year 2008 was the year when the financial crisis started and the government tried to beat the impending slowdown by spending much more than it what normally did during the first four months of the year.

Another point that needs to be mentioned here is that expenditure of the government is front loaded whereas a major chunk of its revenues start to come in only in the second half of the year. Even with this disclaimer, the fiscal deficit for the first four months of this financial year is worrying, given that one of the biggest expenditure items of the year, the extra salaries and pensions that the government needs to pay to its current and former employees after accepting the recommendations of the Seventh Pay Commission, kicks in only from August 2016.

This higher fiscal deficit is also visible in the gross domestic product number for the first three months of the financial year (April to June 2016). One way of measuring the gross domestic product (GDP) is to calculate the total expenditure by adding the consumption expenditure, the government expenditure, investments and the net exports (exports minus imports).

For the three-month period between April to June 2016, the government expenditure went up by 18.8 per cent (in real terms). This helped the GDP grow by 7.1 per cent. Without this push from the government, the growth would have been much slower at 5.7 per cent, as per Nomura.

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The trouble is that the government doesn't have an unlimited amount of money and if it is spending money without earning it first, it's bound to push up its fiscal deficit. A higher fiscal deficit comes with its own set of problems, from higher inflation to higher interest rates.

Further, if the government wants to achieve the fiscal deficit target of 3.5 per cent of the GDP, that it set at the time of presenting the budget, it will have to be a little more aggressive about raising its revenues.

Take the case of the disinvestment target for 2016-2017. It has been set at Rs 56,500 crore. The way it has worked in the previous years is that the government has waited all through the year for the stock market sentiment to improve. And then towards the end of the year, the Life Insurance Corporation of India, has been encouraged to buy what the government has had to sell.

In 2015-2016, of the disinvestment target of Rs 69,500 crore, only around Rs 25,312.6 crore was earned. Of this amount, a major chunk came from the Life Insurance Corporation of India. From the looks of it, something similar may happen this year as well. The Life Insurance Corporation picking up shares being sold by the government is hardly genuine disinvestment, with the money moving from one arm of the government to another.

It is worth pointing out here that timing the market by trying to sell when the stock market is peaking, is very difficult to achieve. And the same applies to the government as well. An ideal strategy would be sell the government stake in companies, little by little almost every month. This wait for the market to pick up is not the best way to operate. The moment any disinvestment of shares stops being an event, will be the day, this strategy will really take off.

Further, given its ambitions in the infrastructure sector, the Modi government needs to look at newer ways of raising revenue. One such way is by selling land. As the Economic Survey of 2015-2016 points out: "Most public sector firms occupy relatively large tracts of land in desirable locations. Parts of this land can be converted into land banks."

These land banks can then be sold in order to raise revenues for the government. This money can go into a sort of an infrastructure fund which can be used to finance the ambitious plans of the government when it comes to roads and railways.

Of course, for this to happen, the reluctance of the bureaucrats to sell land has to be overcome. This reluctance, the Economic Survey comes in large part from the "the fear of 'causing pecuniary gain' to the other side." And this fear will not be so easy to get rid of.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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9 Responses to "Fiscal Deficit for the First Four Months of 2016-2017 is the Highest in Eight Years"

Dr Shailesh Kumar

Sep 9, 2016

Thank you Vivek -
for explaining fiscal deficit in simple language.You have raised the issue of,need for be little more aggressive in raising it's revenues; in order to meet fiscal deficit target of 3.5%. Though it is logical but let's not forget that fiscal deficit is the gap between what the govt.spends minus what the govt. earns.Needless to say the govt.should also be aggressive on cutting down non-developmental expenditure.Billions of taxpayer money is being spent on foreign trips,perks and privileges of elected and non-elected members.Also sluggish decision making,wasting and pilferage of financial resources by govt.staring from the highest and down to local bodies,remains a pertinent cause of ballooning non-developmental expenditure.If the sincere about reducing fiscal deficit it has to work on both fronts of revenue and expenditure.Otherwise it is just fooling the taxpaying citizens.

Like (2)


Sep 8, 2016

Disinvestment has a long history. Do we have a study on who gains and who loses once disinvestment takes place?

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Sep 7, 2016

In 2009 USA used expansionary fiscal policy. On other hand Europe use austerity. Look at the unemployed rate and growth rate in both area.

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Sep 6, 2016

I do not agree with the idea of selling surplus land of Government bodies. It is better to develop that land for commercial purposes and lease it out to various organisations/hotels/shopping complex/transporters etc. The government can raise money by floating reits for commercial development. Thus government can retain potential appreciation of land and rent.

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Sep 6, 2016

Dear Sir Your editorial should have ended " This reluctance, the Economic Survey comes in large part from the "the fear of 'causing pecuniary gain' to the other side." And this fear will not be so easy to get rid of since use of the same ploy actually led this Government to power."

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Rajendra Kumar

Sep 6, 2016

Mr. Kaul I appreciate You for explaining Fiscal Deficit but my submission start from point of selling of land in possession under PSU/Govt. Institution, This Land will be sold to private players and private players will get loan from PSU banks to purchase the same and later this loan will not be paid by them and shall be waived-off by government (by way of Corruption) or private player make faul or become defaulter as in the case of Vijay Mallaya or Reliance (Oil or Natural Gas of worth Rs 11000 crores has been stolen by reliance from ONGC which is National Loss and Govt. is going to waive off it based on relation). So by selling Govt. Land India will be in double loss and Fiscal DEFICIT AND GDP will definitely not Improve and further worsen the situation. Poor will become more poorer and Rich will more Richer.

Like (1)

Professor Asis Kumar Banerjee

Sep 6, 2016

I would request you to write an article on increasing the IMPACT of raising the level of fiscal deficit (fd) to over Rs. 10 lac Cr. (just double that of present level). For fd, does it mean that (a) Would it be 7% of GDP? (mind you that GDP will increase by spending that extra Rs. 5 lac Cr. in affordable housing, agricultural inputs to the poor farmers (you got lots of VOTE in it), roads in & around 100 top cities, and finally spending on "selected youth" (25-35 years) on start-ups, etc. etc., and (b) the level of Govt. debt is still very much lower in than many countries -- yet there is no sign of inflation?

Like (1)

Chandrashekhar Vaidya

Sep 6, 2016


In the past also, I have read critisism about LIC picking up stake sold by the Govt. I fully accept that it is not disinvestement in true sense of the term when LIC picks up major portion.

However, I would like to understand whether LIC has benefitted from these purchases. How have these shares performed in time? How does the performance compare with sensex or any other appropriate benchmark?

I think readers should be enlightened on these aspects as well.

Like (1)


Sep 6, 2016

Wonderful job done by Governor RBI ?
A formidable task for new Governor ?
Let's wait for reaction from Dr S Swamy, MP ......

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