- Education And Career
- Companies & Markets
- Gadgets & Technology
- After Hours
- Banking & Finance
- Energy & Infra
- Case Study
- Web Exclusive
- Property Review
- Digital India
- Work Life Balance
- Test category by sumit
Rising Deficit And Falling Growth
Fiscal policies should be designed that links the implementations of an extensive set of policy measures to achieve higher economic growth and lower fiscal deficit.
Photo Credit : Shutterstock
The economic health of the country has always been a mainstream issue of the discussion among the people of India. The global Covid-19 novel coronavirus pandemic remains an ongoing threat for the economy as well as human lives. It has become a serious cause of an unprecedented economic crisis not only for India, for the world too. The IMF is estimating that it will reduce the world economy by 4.4 percent. The government of India has taken to curb the spread of corona pandemic and save lives. But it has come at a huge economic cost.
Therefore, the revenue of the government is shrinking and the public spending is increasing. The gap between revenue and expenditure has widened. Now, the size of the fiscal deficit is drawing the attention and is expected that it will reach 11-12 percent. In FY20, it has already climbed up to 4.6 percent of the GDP - highest in the last seven years, due to poor revenue realisation. The CGA has calculated fiscal deficit at Rs 9.36 lakh crore against the revised estimate of Rs 7.67 lakh crore and Rs 7.04 lakh crore of budget estimate in its report for FY20. It is 122 percent of revised estimate and 102.4 percent of corresponding period of previous year.
Although, the government had pegged the fiscal deficit target of 3.5 percent of GDP for FY21. However, as per the CGA, the fiscal deficit stood at Rs 9.14 lakh crore upto September against full year budget target of Rs 7.96 lakh crore for FY21. It is 114.8% of budget estimate and 92.67% of corresponding period of previous year. The first two quarters of fiscal deficit secured 4.06 percent of the budget estimate of GDP for FY21 and 4.50 percent of revised estimate of GDP for FY20. What will be the size of the full year fiscal deficit? No one is in the position to estimate.
In the 1990s, the fiscal deficit was a challenging issue. It was growing by on average 10 percent and due to that the government passed FRBM Act 2003. The Act set combined targets for the centre and state deficit to reduce to 3%, 2.8%, 2.5% respectively by FY20, FY21 and FY23. However, the target was amended subsequently through the finance bill. The government revised the target via budget to 3.8 percent for FY20, 3.5 percent for FY21, 3.3 percent for FY22 and 3.1 percent for FY23. Now, the government may have to further review the FRBM Act due to the economic crisis in the shade of Covid pandemic.
To speed-up the economy, the government has already announced a fiscal package of Rs 20.97 lakh crore in May. The government has raised its gross market borrowing target by 5.8 percent of GDP from Rs 7.8 lakh crore to 12 lakh crore. Moreover, another stimulus is needed to boost the economy. It will force the government to borrow more and will further increase the fiscal deficit. The table shows the budgeted estimate, revised estimate and actual data of fiscal deficit and GDP since 2014.
Budget estimate, Revised estimates and Actual receipts (in Rupees Lakh Crore)
Budget Estimates (BE)
Revised Estimates (RE)
% of GDP
% over PY’s RE
% of GDP
% of GDP
Source: Union Budget, * Provisional data from the website of CGA, @Upto September. 2020, PE: Provisional Estimates, AE: Advance estimates, # RE-GDP of 2020
On the other hand, the first quarter of the GDP growth for FY21 shrank at 23.9 percent. Nevertheless, the government had expected that GDP would grow by 10 percent. This is not the first time when the government has overestimated GDP data. The GDP was expected to grow over the revised estimate of each year growth by 13.4% in FY15, 11.5 percent in FY16, 11 percent in FY17, 11.75 percent in FY18, 11.5 percent in FY19, and 12 percent in FY20. However, the actual GDP and growth has been far behind against the estimates. The GDP of last quarter of FY20 reached 3.1 percent and 4.3 percent for the fiscal year.
The GDP shrink is not all of sudden. Data reveals that the GDP is declining since FY19. In the first quarter of FY19, it had increased to 40 basis points to 8.1 percent. But after that it is gradually shrinking on every quarter. The rating agencies and economists have reduced their forecast of the economic growth of the country. While the IMF is estimating a negative growth of 10.3 percent, the RBI has estimated the growth at -9.5 percent. FM Nirmala Sitharaman also said that economic growth could be negative or near-zero this year. It is expected that the economy of the country will contract at a double-digit rate in FY21.
Arresting GDP decline, investing money to create demand and to attract private investment and nursing the deficit shall be immediate priority for the government. The government should make its efforts to increase revenue and reduce public spending. The evidence affirms that the economy can come back on track. Fiscal policies should be designed that links the implementations of an extensive set of policy measures to achieve higher economic growth and lower fiscal deficit.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.