Are we really worrying too much about it?
One of the big stories during the week was the fiscal deficit touching 112% of the full fiscal year target by the end of November itself. It is already being estimated that the fiscal deficit for the full fiscal could overshoot by at least 50 basis points. We could end the fiscal year at 3.7% fiscal deficit as against the level of 3.2% proposed originally. That also means that we could overshoot on the upside in the next fiscal, wherein the FRBM envisages 3% fiscal deficit. Is there room for worry?
Why fiscal deficit is rising?
Actually, a number of factors are at play currently. The demonetization exercise has resulted in slower growth and that is lowered the direct tax collections during the year. The indirect taxes have shifted to the GST umbrella and the GST collections have seen a good deal of weakness in the last couple of months. The disinvestment revenues appear to be on target but the shortfall in tax revenues is likely to really pinch. Then there is the expenditure side of the government accounts. There is a huge $12 billion outlay for bank recapitalization and that is inevitable if the banking sector has to stand on its feet. The Gujarat results have also hinted at a greater rural thrust and that means a more liberal budget in terms of rural spending. Not to forget, it is public spending that has been actually driving GDP growth of late. So, the pressure on the fiscal deficit will continue.
How is the deficit funded?
Fiscal deficit is the total gap that has to be funded by the government. This funding could come in the form of FDI flows, external borrowings or FPI flows. The good news is that India is already the largest recipient of FDI flows in the world and the fiscal deficit has been funded without too much of dependence on hot money flows. Greater reliance on FDI means that the gap is being actually funded by more stable money that is committed to the Indian economy for a longer period of time. This is in contrast to the previous years when the fiscal deficit was largely funded by portfolio flows into India.
The case for pump priming…
If the higher fiscal deficit is intended to prop up growth then it is perfectly legitimate. A 50 bps overshooting in the fiscal deficit is nothing to worry and is also within the broad range set out by the FRBM. Globally, this is referred to as counter cyclical fiscal policy wherein the fiscal deficit is compromised slightly to purchase growth. At the current juncture, the focus should be to get out of the current morass and get past 7.2% GDP growth. India should not obsess itself over the fiscal deficit level too much at this point of time. The need of the hour is to push growth at a time when major developed economies are seeing an economic revival. We cannot afford to miss the growth bus! ©
