Fiscal deficit, borrowings up ahead of polls

The eagerness to appease the farmers has cost the government its goal of fiscal discipline as the NDA government on Friday once again slipped on fiscal deficit and set a slightly revised FY19 deficit target at 3.4 per cent of GDP from the estimated 3.3 per cent while the GDP growth for the year is estimated at 7.2 per cent .

Not just this fiscal, the fiscal deficit target has now been upped to 3.4 per cent in the 2019-20 fiscal from the earlier road map of 3.1 per cent due to income support scheme for the farmers that has been pegged at Rs 75,000 crore. The first installment of this scheme will be credited in March.

But the government is not worried about the fiscal front as it says if the farm support amount is removed then the fiscal deficit is at 3.1 per cent, even below the estimate of 3.3 per cent for the current fiscal.

In his maiden Budget, the Finance Minister Piyush Goyal on February 1 revised the fiscal deficit target to 3.4 percent of GDP to Rs 6.34 lakh crore for 2018-19, reflecting a deviation from the path of fiscal consolidation .   Union Minister Arun Jaitley said that the government is confident of being on the fiscal glide path as per the FRBM act.

For the next financial year 2019-20 also, the fiscal deficit target is now estimated at 3.4 percent of GDP as the full fiscal impact of the income support scheme pegged at Rs 75000 crore for farmers will be felt in 2019-20 , he said.

To fund its expanding expenditure, Gross market borrowing is now seen at Rs 7.1 lakh crore in FY20  from 5.7 lakh crore estimated his year.

Interim Finance Minister Goyal said the gross market borrowing was seen at Rs 7.1 lakh crore in FY20. In September 2018, the Centre had cut its gross borrowing for 2019 fiscal by Rs 70,000 crore showing confidence in the fiscal deficit control measures .

But now due the increase in repayments due in the coming year (Rs 2.5 lakh crore in FY2020 against Rs 1.6 lakh crore in FY19), the size of the planned market borrowings for FY20 is slated to go up.

The government will borrow Rs 4.48 lakh crore from the market in 2019-20, marginally higher than the Rs 4.47 lakh crore estimated for the current financial year ending March 2019. According to the Revised Estimate, the net borrowing for the current fiscal was raised to Rs 4.47 lakh crore as against the Budget Estimate of Rs 4.07 lakh crore. Budget 2019-20 documents showed that gross borrowing would be Rs 7.1 lakh crore for 2019-20, higher than Rs 5.71 lakh crore estimated this year.  Gross borrowing includes repayments of past loans. Repayment for past loans in the next fiscal has been pegged at Rs 2.36 lakh crore. Government raises funds from the market to fund its fiscal deficit through dated securities and Treasury bills.

But all these has not deterred the FM to see greenshoots of growth.  India brightest spot in the world; GDP growth fastest in last 5 years, he said.

"India has emerged as the brightest spot in the world in the last five years during which the country witnessed the fastest GDP growth higher than under any previous governments  and has broken the back of double digit inflation”, he added. 

But it is the fiscal roadmap deviation which the market in all possibility will react tomorrow. The farmer income support scheme has disarrayed the fiscal maths roadmap of the government by pushing the 3 per cent deficit by a year to 2022 . The difference between the expenditure and revenue or the fiscal deficit for 2020-21 and 2021-22 estimated at 3 percent of GDP. Government’s stated commitment earlier was to bring down the fiscal deficit to 3.1 percent of GDP by the end of March 2020, and to 3 percent by March 2021.

Goyal in the post Budget press conference said “We would have maintained fiscal deficit at 3.3 percent for the  year 2018-19 and taken further steps to consolidate fiscal deficit in year 2019-20. However, considering the need for income support to farmers we have provided Rs 20,000 crore in 2018-19 RE (revised estimates) and Rs 75,000 crore in 2019-20 BE (budget estimates),” Goyal said, while presenting the interim budget.

The finance minister said excluding the impact of income support for farmers, the fiscal deficit would have been less than 3.3 percent of GDP for 2018-19 and less than 3.1 percent for the year 2019-20. The scheme, which will be funded entirely by the government,  will kick in retrospectively from December 2018. The scheme  will cost Rs 75,000 crore in 2019-20, and Rs 20,000 crore for the remaining part of the current financial year, Goyal said.

 The government aims to achieve a fiscal deficit of target of 3 per cent of GDP in 2020-21  as well as 2021-22. During April-November, India reported a fiscal deficit of Rs 7.16 lakh crore, which translates to 114.8 per cent of its  full year target.

Brokerage firm Nomura said the pause on FY20 fiscal consolidation is a negative surprise. Moody's aligned the slippages as "Budget proposes new expenditures pressuring fiscal consolidation ".

But the government managers say its not a worry. Amitabh Kant,  Niti Aayog CEO said 3.4 per cent is not a number to worry while his colleague vice chairman Rajiv Kumar said without farm package the deficit is at 3.1 per cent.  Market  guru Mark Mobius says Mark Mobius says fiscal deficit number of 3.4% is not such a bad number also says that India is the  leader among emerging markets.

“The fiscal deficit flat at 3.4 per cent of GDP is a sharp deviation from fiscal consolidation roadmap, which is a disappointment. The consequent numbers of both net and gross market borrowings seem higher than market expectation,” said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank.