Honoring 3.4% fiscal deficit has little more than academic value
The government was almost celebrating when the full year fiscal deficit came in at the targeted rate of 3.4% of GDP. Of course, this is a revised target because the original target of 3.2% was modified in the interim budget. In a tough year, stemming fiscal deficit at 3.4% is surely no mean achievement but there is more to it than meets the eye. One must break up the revenue and expenditure side to get a granular picture.
Revenues have fallen short
If you look at the major sources of revenues for the government, it has fallen short on most fronts. The direct tax revenues for the year were short by Rs.50,000 crore. The GST collections fell short by nearly Rs.100,000 crore. The disinvestment revenues were artificially inflated through forced deals like ONGC taking over HPCL, which may not exactly be in the larger interest. The total disinvestment numbers may have been overstated due to CPSE ETFs, buybacks and liberal dividends.
Cutting expenses have a cost
Government resorted to expenditure control to keep the fiscal deficit in check. That means primary health and primary education have taken a hit. That is not long term accretive. Also, the government has aggressive plans for infrastructure and rural incomes. All this could throw fiscal deficit numbers out of shape. This must be watched!
What about state fiscal deficit?
That is a question not too many people are asking. For example, some of the items like Uday Bonds for power companies and the agriculture loan write-offs are all being routed through the state. The state fiscal deficit overall is as high as the central fiscal deficit. If that is added to the federal deficit then the situation looks a lot more delicate.
There is the window dressing
It is said that there is no balance sheet without dressing up and the national balance sheet is no different. Take some instances of off-balance sheet financing. Getting ONGC to borrow to buy the government stake in HPCL is off the balance sheet. Downstream oil sellers taking a subsidy hit is also off balance sheet. Finally, the biggest off-balance sheet benefit for the government is the food grain subsidy that gets routed through the FCI. If you add all these up, the reality could be a lot grimmer.
Little by way of pump priming
The whole idea of a higher fiscal deficit is to pump prime the economy. But that is missing. IIP is at a 20 month low and GDP is below the 10-year average. As per CMIE, unemployment is at 7.5%, a record in many years. Without pump priming, the fiscal deficit is just like taking a loan for the morning breakfast. It is time to show the real fiscal deficit!
