Mr Jaitley, Will the Fiscal Deficit Target for FY17 Be Met?

Fri, 9 Sep Pre-Open

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Fiscal deficit for April-July period had already reached 73.7% of the Budget estimate (BE) for 2016-17, read many financial dailies a few days back. This came after the Controller General of Accounts (CGA) declared the fiscal deficit of the government on 31st August. As per the CGA, the fiscal deficit for the period April to July 2016 stood at Rs 3,934.87 billion. And this amount stands at 73.7% of the annual target for FY17. Moreover, it is also recorded as the highest in the last eight years.

So what does this mean? How bad is this number? Is the government running into troubles? What steps are in place to overcome this? Let us put things in perspective to answer these questions.

First things first, the fiscal deficit is the difference between what a government earns and what it spends during the course of any year. The difference is met through borrowings. A drop in fiscal deficit means higher revenues earned or fewer expenses incurred by the government.

Going by the above definition, the current set of data on the fiscal deficit front tells us that the government is earning much less or it is expending too fast. In all, it is a losing proposition. And this is worrisome. Allow us to explain.

It must be noted that the government has retained the budget estimate fiscal deficit target for FY17 at 3.5% of GDP. This looks as an overoptimistic target to us. There are many impeding reasons that lie in front of this target.

One is the idea that the government wants to bring down its deficit by raising revenues through the divestment route. However, going by the history, the government has not delivered on its promised divestment targets. In 2015-2016, of the disinvestment target of Rs 695 billion, only around Rs 253 billion was earned. Also, the government has a tendency of pushing its divestment deadlines depending on stock market conditions, which is not the best way to operate.

The second big concern is the payment of salaries under the 7th Pay Commission. One must note that the government needs to pay extra salaries and pensions to its current and former employees after accepting the recommendations of the 7th Pay Commission. This payment is considered as one of the biggest expenditure items of the year. And this is worrying because the payment kicks in only from August 2016. This means that the expenses of government are going to rise in the coming days and it will further increase the fiscal deficit in the coming months.

Apart from the above, we have the problem of loss-making public sector undertakings (PSU). Several PSUs continue to incur heavy losses and the government seems to be making no effort to sell them off or shut them down. These, in turn, will increase the government's expenditure and eat up the taxpayer's money. Lastly, not to forget the issue of rising non-performing assets (NPAs) that have kept Indian PSU banks in a precarious state.

A point that needs to be mentioned here is that the 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. However, even with this disclaimer, the expenditure of government looks far more than its receipts in FY17.

Going by the above factors, the government's fiscal deficit target seems to be under stress. And this begs the question: What shall the government do to keep its bargain on the fiscal deficit front? Vivek Kaul, editor of Vivek Kaul's Diary, has answered this question in one of his recent articles. He has also just launched the Vivek Kaul Letter which outlines the Indian economy and its many challenges.

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