Fiscal deficit: Govt may retain 3.5% target for this year; relaxation likely for FY18

Fiscal deficit is the shortfall in the government's revenues to meet its expenditure. The government bridges the gap through market borrowings.

The budget gives out the revised estimate of the deficit for the previous financial year and also the estimate for the next. The number is expressed both in absolute terms and as a percent of GDP.

The importance of the number is that it gives an indication as to how the government is managing its expenses. The smaller the number, the better. So, the government's endeavour should ideally be to bring the deficit under manageable levels.

 Fiscal deficit: Govt may retain 3.5% target for this year; relaxation likely for FY18


A higher fiscal deficit means the government will borrow more from the market through issuance of government securities. This would, in turn, result in higher interest payout from the government. Thus a higher fiscal deficit reveals the financial weakness of the government.

For the current financial year, the government has set a deficit target of 3.5 percent of GDP. Economists widely expect the government to hold on to the target though many want the government to consider relaxing the target and spend more to boost the economy.

"Given that growth is stagnating at about 4.5 per cent in the old GDP series, we have always believed that the Centre should relax fiscal deficit to combat a global recession that could prove to be longer than the Great Depression," Bank of America Merril Lynch said in a note. The brokerage, however expects the government to retain the target for the current financial year.

Under a roadmap to narrow the fiscal gap, the Centre was committed to reduce fiscal deficit to 3 percent in 2017- 18. However, in his last Budget, Jaitley had announced a review by a panel and suggest a range rather than a target.

BofA-ML said it expects the committee headed by NK Singh to relax the next year's fiscal deficit target to 3-3.5 percent of GDP from 3 percent.

On the expenditure front, the focus will be on the seventh pay commission payouts to the government employees, state-run bank recapitalisation and rural spending, among others, it said.

It expects benefit of up to Rs 1 trillion which will come out of the income disclosure scheme, which will be useful to step up the bank recapitalisation targets without impacting the budgeted capital expenditure.

Further, a Rs 50,000-crore special dividend to be expected from RBI because of demonetisation will be utilised for public expenditure in the run-up to the 2019 general elections, said the note.

The Wall Street brokerage flagged rising oil prices as a key risk to public finances, especially if the Centre holds the diesel prices at their peak.

The higher fiscal deficit number, coupled with an estimated Rs 2.2 trillion in buyback of government securities by RBI next fiscal year will lead to excess demand for government paper, it said.

With PTI inputs

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Updated Date: Jan 17, 2017 12:21:59 IST