Budget 2019: Govt breaching 3.3% fiscal deficit target no big deal, but then why do we need FRBM Act that no one is serious about?

Budget 2019 is not far and there are signs of the government missing the 3.3 percent fiscal deficit target set for 2018-19. If that happens, this will be the third consecutive year the government being stuck at almost the same deficit level of 3.5 percent. Any economist that you come across would tell you that higher deficit is no good thing. In fact, you don’t need to be an economist to say that. When income falls below expense, things can turn awry.

Remember, even the 3.3 percent is a delayed target and a clear deviation from the earlier commitment stipulated under the Fiscal Responsibility Budget Management (FRBM) Act. In the Budget 2018, the target was 3.2 percent but the government ended up with 3.5 percent target.

This year, given the unimpressive revenue collection (mainly GST revenues missing expectations by a far margin), higher expenditure and likely populist packages that is typical in an election year, the government is sure to miss even the the 3.3 percent target set.

File image of finance minister Arun Jaitley. Reuters.

File image of Finance Minister Arun Jaitley. Reuters.

According to India Ratings and Research, the slippage in Central government's fiscal deficit in 2018-19 is likely to be Rs 39,900 crore, corresponding to a higher deficit figure of 3.5 percent. We don’t know what’s it going to be.

The government can defer some expenditure or try a last minute disinvestment rush riding on the back of Life Insurance Corporation (LIC), the government’s official milch cow.

But, despite all this, there is a likelihood that the fiscal deficit may end up above the target of 3.3 percent. If that happens, India is consistently failing to honor the fiscal deficit commitment under the FRBM. This would raise some uneasy questions on the country’s commitment to fiscal prudence.

Originally, the government had estimated a fiscal deficit of Rs 6.24 lakh crore, or 3.3 percent of the GDP, for the current fiscal year. But, for April-November itself, the deficit stood at Rs 7.16 lakh crore, or 114.8 percent of the target.

Needless, yet again missing the fiscal deficit target will be a clear turnoff from the point of view of multilateral institutions watching Indian economy and rating companies. The FRBM came into existence in 2003 in order to make the government accountable to sound management of its finances but it has not been a big success so far. This Act was reviewed in 2016 and the committee concerned charted out a path to cut the fiscal deficit to sub-3 percent in the years post 2020.

Earlier, the Comptroller and Auditor General of India (CAG) too had raised an alarm on the government taking the FRBM Act too easily. It said that the government resorted to market borrowings for revenue as well as capital expenditure, after it exceeded expenses from the FRBM set limits.

Of course, the Act offers some leeway to the Central government to deviate from the deficit target; for instance if there is a severe economic crisis in the country on account of drought, but we have no such situation as of now.

Of course, Finance Minister Arun Jaitley has, time and again, expressed his confidence in achieving the target. But that doesn’t look likely as of now.

There are a few reasons. First, the Goods and Services Tax (GST) collections have been lower than expectations. The GST collection dropped to Rs 94,726 crore in December 2018, lower than Rs 97,637 crore collected the previous month.

The GST collections have consistently fallen below target. In the nine months (April-December) of the current fiscal, the government has mopped up over Rs 8.71 lakh crore from GST.

According to economists at SBI research, the shortfall in indirect taxes will be to the tune of Rs 90,000 crore on account of the poor GST show and excise duty cut on petroleum products.

Now, look at the disinvestment figures, which constitute a major part of the revenue. So far, the government has managed to mop up Rs 34,142 crore as against a target of Rs 80,000 crore. There was no investor appetite to put money on the table to facilitate large-scale disinvestment.

Direct tax collections, on the other hand, have kept up with pace. The direct tax mop up grew 14.1 percent to Rs 8.74 lakh crore during April-December 2018, according to the finance ministry data. But, good show in direct taxes may not be enough for Jaitley to achieve what is hoping for.

Also, don’t forget that the government is in a difficult year as it looks for some ways to spend money so as to appease the voters ahead of the 2019 general elections. Between now and April-May, there is a fair likelihood of more distributions happening.

We don’t know what it is going to be. Politics is much more important for any government than good economics when confronted with crucial elections.

The Central government is not legally bound to honor FRBM targets; at the best it is a guiding path. In the UPA years too, there have been multiple occasions when these targets were given a convenient miss. But, the question is if no government is particular about the FRBM Act, if the targets are too flexible to tweak every now and then, do we really need an FRBM Act?

(Data from Kishor Kadam)



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Updated Date: Jan 15, 2019 10:16:24 IST

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