Fiscal deficit always has a much larger implication because it shows the extent to which the government needs to borrow to balance its budget. Even since the Fiscal Responsibility Act was passed in 2004, the government has tried hard to keep the fiscal deficit in check. Of course, there have been instances during the UPA regime and the NDA regime; when there have been clear cases of transgressing the limit. The entire issue of fiscal deficit came back to the fore when Jaitley admitted that the actual fiscal deficit may be closer to 3.8%. Why is this important?

Fiscal deficit: 3.8% or more?

For the fiscal year 2018-19, the GST and direct tax revenues fell woefully short. The government had already overshot the fiscal deficit by 20 bps and did not have room for more. The clear loser was the expenditure side. The government actually cut down expenses by Rs.1 trillion to keep the fiscal deficit in shape. That clearly implies that quite a few key areas of allocation like education, health care, defence and infrastructure would have taken a hit. Cutting expenditure, especially with productive and long term externalities, have dual implications. They put off the liability to a future date and understate the fiscal deficit. Also, such a move has its clear implications on national productivity since important items of long term value are being put off to a future date. Fiscal deficit for last year should have been 3.8%, ideally.

What about state deficit?

There are two important reasons why the central deficit of the government may not give a very clear picture. In fact, economists have pointed out time and again that the real risk for the Indian economy could stem from the state deficits, which are now as high as the central fiscal deficit. Let us understand how this comes about. Firstly, the government has been promising farmer write-offs; left, right and centre. This has a direct impact on the fiscal deficit of the states. With farm distress rising, this could become a bigger problem. Secondly, power sector dues of SEBs are now monetized by UDAY bonds. But the liability still rests in the books of the state. One needs to add this to get a clear picture.

Some creative accounting too

There are other indirect accretions to the fiscal deficit that are not recorded. ONGC buying out the government stake in HPCL and making borrowing for the same is fiscal deficit. Similarly, parking food grain dues to the tune of over Rs.1.50 trillion in the books of FCI is also a virtual accretion to the fiscal deficit. Then there is the oil subsidy which tends to be normally passed on partially to the OMCs. If all these are added up, the fiscal deficit of the government would be much higher. It is time to get a real picture of the deficit and tune strategy accordingly! ©