Story Of The Week

Deficit under Pressure, Budget on its way

The Modi government budgeted a fiscal deficit of Rs. 6.24 lakh crore for FY19 or 3.3 % of GDP. Last year the government missed the target ending at 3.5% of GDP against budgeted 3.2% of GDP. Modi government has been struggling to manage deficit since it came into power. Further, deficit targets are expected to breach this fiscal year too. As we have elections in 2019 and with less than a month left for the Budget, the government is expected to infuse policies that attract and maximize its vote bank. This has direct impact on the deficit which is already a pain point.
In this article let’s discuss in length the reasons of deficit and its impact in this government so that we better analyze the upcoming budget in terms of it’s implications on the Indian Economy.

Source: qz.com

What caused the Deficit

As per the CARE Ratings the Fiscal Deficit will come in at 3.5% as against the targeted 3.3% signifying a slippage of Rs. 20,000 crore. This year a number of reforms by the government has led to the slippage.Let’s delve deeper into the various influencers of this deficit

Disinvestment Proceeds:

One of the major reason for the same being the government’s inability to meet the targeted disinvestment. The government planned disinvestment of Rs. 80,000 crore. However this target was not achieved as the conditions of market were highly volatile this time.

Realized Growth in Indirect Taxes

The budgeted growth in the center’s indirect taxes for FY 19 was 19.2%, however the realized growth during the first half of the fiscal was around 4.4%. This also compares adversely with the 23% growth in indirect tax revenues in the year-earlier period.

Subsidies

Modi government  allocated ₹2.9 trillion for various subsidies in the year 2018-19 budget, inclusive of ₹24,933 crore which is for petroleum subsidy. Analysts say is an underestimation considering that fuel subsidies stood at ₹24,460 crore in 2017-18, when average crude oil prices were much lower.

Minimum Support Price

The higher MSP for crops and sugarcane added to the fiscal pressure where government has promised a price of 1.5 times more than the input costs of farmers in the previous budget. This number was further hiked by 25% in July 2018 for certain crops which further widened the deficit.

Effect of declining collection of GST

The deficit has further broadened when government realized comparatively lower number of GST returns in the year 2018-19 when compared to 2017-18. The government also recognized some cases of false claims of input credit ( around 499 ) which amounted to be around 3000 crore as compared to just 4 cases of 9.75 crore in the fiscal year 17-18. The indirect tax revenues have also declined substantially post the introduction of GST, month after month.

Rising bond yields

Mr. Arun Jaitely, honourable Finance Minister announced a relief package to farmers this week which may be seen in the budget ahead.The direct implication of this is visible in the increase in the rate of bond yields which rose by 23 basis points to close at 7.61% this Friday. The announcement will be a major cause of further widening of deficit, thus strengthening the anticipation of breach of fiscal target this year again.It may be a political move by the government in power ahead of the Elections in 2019 but it will leave a major financial impact.

Major Implications

The deficit leaves imprints on the economy in various ways. Thus it’s important to figure out the those implications such that we are alert of what come in due course of time

An expansionary fiscal policy always attracts many different school of thoughts. But what is certain is the after effect or the impact of this rising Government expenditure on the numerous factors constituting our economy.

1.Cutting back Capital expenditure

The government may retaliate by cutting capital expenditure if the deficit continues to widen further.A reduction in capital expenditure is not desirable as it slows down the growth of the economy as well as GDP. Hence, the government should be cautious about its expenditure and revenue sources. The policies introduced should be in lines with the available sources of revenues and funds

When we talk about India, the government has been cutting down capex to meet its fiscal targets in previous years.

2.Inflation:

A rising or expansionary fiscal policy raises the amount of fiscal deficit in the economy. To cover the associated revenue expenditures, Governments usually raises monetary supply via the means of borrowings. This amplifies the velocity of money and raises the level of aggregate demand.
However, a disparity is caused between the demand for various goods and services as well it’s supply, which is usually slightly inelastic in nature. Thus, inflation occurs as a result of this imbalance between demand and supply for money.

3. Taxes:

High fiscal deficit implies that government is not able to earn as much as it is spending. So, it often raises taxes in some form or the other. The government, in order to repay its debt, is likely to levy more taxes in the future. It could be either higher inflation or higher taxes. Or, worse, it could be both

4. Interest Rates:

Within an emerging economy such as India, a higher fiscal deficit leaves little or no room for interest rate cuts. In fact, on the other hand, a higher interest rate may affect private investments from taking off in a growing economy like India. Banks have already witnessed a slowdown in credit takeoff. Borrowing costs may also remain high for consumers.

Conclusion

Fiscal deficit is one of the major issues in any economy. Government has to keep into consideration various factors to maintain the deficit target.The need of the hour is to recognize those factors and achieve the targets.Inflationary, interest rate and tax pressures are the result of such & nbsp; widening deficit.Being ready for any such pressure is what is desirable out of any economy.
Further, 2019 is expected to increase the pressure further as the government may put in place certain policies that benefit a certain section of society such that the vote bank widens for upcoming elections.
The government has already started talking about relief package to Farmers.There may be more to come which may aggravate the issue.
Let’s look forward to Budget 2019 to see how the government manages the deficit and how the dynamics evolve further.

References

  1. https://qz.com/india/1475692/if-modi-misses-fiscal-deficit-target-indias-economy-may-be-hit/
  2. https://economictimes.indiatimes.com/news/economy/indicators/fiscal-deficit-widens-in-h1-of-fy19/articleshow/66364050.cms
  3. https://www.livemint.com/Politics/p4JEOENOjSbenKznG8ceqJ/India-set-to-miss-201819-fiscal-deficit-target-due-to-reven.html
  4. https://www.bloombergquint.com/global-economics/india-s-budget-threat-back-in-focus-after-modi-loses-key-state
  5. https://www.forbes.com/sites/salvatorebabones/2018/05/08/indias-disappearing-deficit-whats-putting-modi-in-the-drivers-seat-for-2019/#6d354055ab62
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