Inflation looms large
Fiscal deficit target looks to compress capital expenditure
With global economic situation vulnerable in the face of the US-China war, appreciating dollar and the currency crisis in some of the emerging economies, India needs to be careful in ensuring its macroeconomic fundamentals remained strong and stable.
The twin deficits of fiscal and current account deficits are a matter of concern. Current account deficit surging towards unsustainable 3 per cent of GDP, fiscal deficit though at manageable level, is under pressure. The combined fiscal deficit of the Centre and states is not in a happy situation.
In the case of the Centre, Finance Minister Arun Jaitley may be confident of meeting the fiscal deficit target of 3.3 per cent of GDP this financial year to please global credit rating agencies but the fear is it may lead to contraction of public capital expenditure, which is already low in GDP terms when compared to the previous year.
This is not good for the economy, warn analysts, who feel the trend in recent years to lower public capital expenditure as a percentage of GDP does not augur well. In 2017-18, the budget provided public capital expenditure of 1.2 per cent of GDP and in this year's budget the share has come down to 0.9 per cent of GDP.
As it is, the Narendra Modi government made a major amendment in this year's finance bill, which went unnoticed. It has inserted provisions in the Fiscal Responsibility and Budget Management (FRBM) Act to allow higher than mandated borrowing and possibly spending, till possibly the 2024 Lok Sabha election cycle.
In an ideal fiscal situation, tax and non-tax revenue are used for administrative expenses and capital receipts, including market borrowings, are used for infrastructure expenditure. The amendment ensures that the government will no longer have to report revenue deficit numbers and debt limit will run parallel to fiscal deficit target. Revenue expenditure usually reflects the consumption expenditure of the government.
No one is questioning the government's ability to achieve 3.3 per cent of GDP fiscal deficit target this year. My question is about the composition of fiscal deficit rather than the headline fiscal deficit.
As per the original FRBM Act, over a period of time government borrowing is to be utilized for capital expenditure only and the consumption expenditure is fully met by revenue mop-up. That's why FRBM proposed that revenue deficit is brought to zero and fiscal deficit to 3 per cent of GDP. The deficits are met by borrowing.
The N K Singh Committee recommendations diluted the targets and gave more time to bring down fiscal deficit to 3 per cent of GDP. It also said revenue deficit need not be brought down to zero but 1.4 per cent of GDP.
But this also meant that there has to be some switching of revenue expenditure to capital expenditure, which means borrowing for revenue expenditure should be reduced and for capital expenditure increased.
The finance bill clearly states there will be only fiscal deficit and public debt targets in FRBM. This means the government has indirectly stated there will be no concept of revenue deficit hereafter.
This is not expansionary. This means shifting of expenditure from capital to consumption. Whenever there is fiscal stress, the first victim will be capital expenditure, which is not good for the economy.
This financial year though there is some stability in expenditure, there is a lot of uncertainty over revenue. As it is, the target of Rs one lakh crore revenue mop up from GST every month has not happened so far. With the downward revision of GST rates periodically, Rs one lakh crore target will be elusive for some more time.
There are also assembly elections round the corner later this year and Lok Sabha elections next year. There are already indications the government may reduce high taxes on oil to moderate skyrocketing domestic fuel prices, a populist measure resorted to before elections. This may put more pressure on already strained revenue collections. There are election pressures as well, which may force the government to indulge in populism and ultimately the public expenditure will become the fall guy.
"Fiscal consolidation is not fiscal compression. Fiscal consolidation should always lead to higher growth provided expenditure switching mechanism does not lead to expenditure compression mechanism, which will lead to contraction rather than expansion of the economy," NIPFP economist N R Bhanumurthy said.
Care chief economist Madan Sabnavis is of the view that there are pressures on fiscal deficit and it can be met this year only through public expenditure compression due to slippages in revenue targets of GST and mop-up through disinvestment.
Crisil chief economist D K Joshi said that the twin deficits – fiscal and current account—which had improved during the Modi regime has started reversing from last fiscal. The runaway rise in oil prices could stir inflation scourge back to life and impact other macro indicators too.
A Crisil report said a back of the envelop estimate shows every $10 per barrel increase in crude oil price can shore up India's fiscal deficit by 8 basis points as a percentage of GDP and similarly current account deficit by 40 basis points. The free fall of the Rupee could only worsen the situation with India importing 80 per cent of its crude oil requirement, analysts said
With most public sector banks facing huge NPA problems, big-ticket loans are not easy to come to kick-start private investment. It is, therefore, a double whammy – compression in public capital expenditure as well as private investment.
(The views expressed are strictly personal)