High fiscal deficit not good news

High fiscal deficit not good news

The possibility of the government skidding on the fiscal deficit front is hardly good news at the close of a turbulent year that saw demonetisation and a hurried introduction of a flawed Goods and Services Tax ravage the economy, particularly the cash-dependent rural economy. India, according to the International Monetary Fund has a fiscal deficit that is among the highest in the G-20 countries. With a fiscal deficit pegged at 3.2 per cent of GDP it is second only to Brazil, which has a fiscal deficit of 10.4 per cent. In monetary terms the high fiscal deficit is Rs 6.12 lakh crore for the April-November period as against the Rs 5.47 crore target for the whole year. It has already spent 60 per cent of its budgeted spending. In short, if the Government of India was a housewife, the family would be in deep trouble with the household expenses exceeding its budgeted target. This is India’s position today. Fiscal deficit per se can be acceptable if the expenditure is for productive purposes, but in this case it is not. It is merely to bridge the gap between the government’s earnings and expenditure.

Globally a high fiscal deficit makes India a less attractive destination for foreign investment and though India’s rating was hiked recently by a global rating agency, the possibility of a ratings downgrade cannot be ruled out unilaterally. This could also impact Prime Minister Narendra Modi’s “Make in India” programme, as he expects foreign direct investment to be a main stimulus. The fears of a skid have been stoked by the government’s unusually high additional borrowing of Rs 50,000 crore this week. To an extent it can be acceptable considering that its revenues were down because of the cutting down costs of several items under the GST. Revenue collection has been a mere 40 per cent of the target. The government’s total receipts at the end of November were just little over 54 per cent of the Budget estimate at Rs 8.67 lakh crore.

It was a pro-people move. The large borrowing however signals the possibility of the government cutting down on its spending on infrastructure, transport and services with all its related adverse consequences in order to shore up its finances. One of the consequences of concern is job creation because without this there would be little growth in employment. If employment is not forthcoming for the millions that join the labour force each year it could create social problems. The economy today is being largely fuelled by government spending.

Private investment has to start flowing in after a gap of nearly two years. Though there are signs of private investment happening they are too weak to inspire stability. The ills of a high fiscal deficit are well known and include pushing up demand artificially which could lead to inflation and, more importantly, it could mean reducing the space for the RBI to cut interest rates. While the government seems firm on sticking to its fiscal deficit, there is a high probability that it could raise taxes in the future to maintain its position. This is not good news on the eve of 2018.

Courtesy : Deccan Chronicle Editorial