Insights into Editorial: Governing India through fiscal math
The Budget 2019-20 has pegged the fiscal deficit for the year 2019-20 at 3.3% of GDP.
Revenue deficit is targeted at 2.3% of GDP, which is higher than the revised estimate of 2.2% in 2018-19.
Note that the government is estimated to breach its budgeted target for fiscal deficit (3.3%) in 2018-19 and the medium-term fiscal target of 3.1% in 2019-20.
The Government has committed to the path of Fiscal consolidation under the FRBM act. Under this act, the Government has targeted to reduce the FD to 3% of India’s GDP.
But the argument is that the Government’s sole focus on reducing Fiscal deficit is not sound economic management. Apart from Fiscal Deficit, the revenue deficit must also be in picture.
Fiscal Deficit and Revenue Deficit:
The fiscal deficit by alone may not provide a true and complete picture of the government finances.
Both Fiscal Deficit and Revenue deficit are required to be lower for efficient management of public finances.
Presently, the fiscal deficit for the financial year 2018-19 is 3.4% while the revenue deficit is 2.2%. Thus, the revenue deficit accounts for around two-third of the fiscal deficit which shows that the some of the Government’s borrowings have been diverted towards meeting the operational expenses.
Fiscal Deficit will not reflects the 360 degree Picture of Development and Growth:
- While a sound fiscal policy is highly desirable, the magnitude of the fiscal deficit is not always and everywhere thinking here of the state of the economy a good measure of soundness.
- First, the fiscal deficit reflects the overall imbalance in the Budget. Embedded in the accounts of the government is the revenue account which is a statement of current receipts and expenditure.
- A fiscal deficit may or may not contain within it a deficit on the revenue account, termed the “revenue deficit”.
- The possible embeddedness of a revenue deficit within a fiscal deficit muddies the waters somewhat.
- For movements in the overall, or fiscal, deficit by itself tell us nothing about what is happening to the revenue deficit.
- We worry because it is the balance on the revenue deficit that indicates whether the government is saving out of its income or spending more than it receives as current revenue. A revenue deficit implies that the government is dissaving.
India opting for overseas bonds:
The government has announced its plans to raise a portion of its gross borrowing from overseas markets.
While several commentators have argued that this is a risky move, the government itself is convinced that it will help boost private investment in the country.
A government bond or sovereign bond is a form of debt that the government undertakes wherein it issues bonds with the promise to pay periodic interest payments and also repay the entire face value of the bond on the maturity date. So far, the government has only issued bonds in the domestic market.
The government has been arguing that the quantum of its borrowing within India is ‘crowding out’ the private sector. In other words, it is saying that government borrowing is at such a level that there are not enough funds available for the private sector to adequately meet its credit and investment needs.
Issues concern with Overseas Bonds:
- However, the other side is that, with this, India might follow the path of some Central and South American countries such as Mexico and Brazil.
- In the 1970s, several of these countries borrowed heavily overseas when the global market was flush with liquidity. But then, when their currencies depreciated sharply a decade later, these countries were in big trouble as they could not repay their debt.
- This would also lead to a quicker increase to its foreign exchange reserves, which would lead to a stronger rupee at a time when it is already appreciating against the dollar.
- A stronger rupee would encourage imports at a time when the government is trying to curb them, and discourage exports at a time when they are being encouraged.
- And also, if rupee depreciation for whatever external reason would prove even more disastrous as it would make it far more expensive for India to repay its external debt.
- Dollar-denominated debt has to be repaid in dollars. Right now, our reserves are fairly high but this could change.
- Oil prices could go back to where they were, the trade war initiated by U.S.A holds little prospect for faster export growth, and portfolio investment may flow out.
- With revenue deficits the overwhelming part of the fiscal deficit, we would be borrowing to finance consumption.
- While these are only possibilities, they point to the need to ultimately base your borrowing plan on expected dollar earnings. The opportunity offered by low global interest rates right now is not matched by the likelihood of robust export growth.
Thus, reduction in the Fiscal deficit by the government may not provide a true picture since such a reduction may be brought about through the reduction in the capital expenditure, which is undesirable.
Further, the government has recently announced in the budget that it would borrow money through the issue of overseas sovereign bonds.
This raises further concerns because the revenue deficit is major part of Fiscal deficit, thus we would resort to international borrowing to finance our current operational expenses.
To suggest that fiscal prudence rewards economies is to suggest both that the fiscal deficit is the right indicator of fiscal soundness and that reducing it is bountiful.
Therefore, unless the revenue deficit is kept explicitly in the picture, we cannot deduce the soundness of economic management from a mere reduction in the fiscal deficit.