New Delhi: Amid the turmoil of Covid-19, the Indian government presented its 73rd annual budget since independence. In order to stimulate India’s economic growth and development, the union budget directs its resources to various sectors in detail. While examining the merit of the budget, one of the biggest parameters is to analyze the “Fiscal Deficit” of the country. Covid-19 has already steered the burden on the economy in terms of unprecedented expenditures. When the current government is continuously striving to revive the economy, one can actually deep dive into its implications.
 
Fiscal Deficit & Limits Set By FRBM Act


As per the FRBM Act, “fiscal deficit refers to the excess of total disbursements, from the Consolidated Fund of India, excluding repayment of debt, over total receipts into the Fund (excluding the debt receipts), during a financial year”. In other words, it is the negative balance that arises when the government spends more than what it actually receives in the form of taxes and other revenues. This difference is calculated both in absolute terms and also as a percentage of the Gross Domestic Product (GDP) of the country. The most common way of financing the deficit is through borrowing. The borrowing requirement of the government in the financial year can also be interpreted as the fiscal deficit in that year. 


In order to improve the financial stability and introduce transparency in India’s Fiscal Management System, The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003. 


Targets For Govt To Reduce Fiscal Deficits


In May 2016, the government set up a committee under NK Singh to review FRBM Act. The committee recommended that the government should target a fiscal deficit of 3 percent of the GDP in the years up to March 31, 2020 cut it to 2.8 per cent in 2020-21 and to 2.5 percent by 2023.


The Covid Tantrum


The Covid-19 pandemic caused an additional burden for the government in terms of shortfall of revenues and expansion of welfare measures.The enhanced borrowings on account of Covid-19, led to a fiscal deficit surge from 4.6% of GDP in 2019-20 to 9.5% in 2020-21. With the recovery of the economy, a declining trajectory can be seen with the government targeting a fiscal deficit of 6.4% for the year 2022-23. Though the government is still far away from the targets set by the FRBM Act, there are still certain inline implications to capture into.


Capex Increase


Although the government saw a sudden surge into the fiscal deficit and then eventually trying to reduce the numbers. On Tuesday, there were certain announcements by the government that can give an optimistic outlook to the narrative.


Minister Nirmala Sitharaman on Tuesday announced an increase in the capital expenditure for FY’23 by a sharp 35.4% to a record Rs 7.50 lakh crore from Rs 5.54 lakh crore in FY’22 thus reaching almost 3% of GDP showing more investment in assets. 


The capital spending push will actually act as a multiplier for inducing speedy and sustained revival of the economy. While the country is looking for more investments in the public sector, it will actually crowd in the private investments thus pumping up the economy and demand in a sustainable manner. As the economy will grow further, the revenue collection from all the sources is expected to be more robust, helping to strengthen the fiscal position on one hand, and create fiscal space on the other.


While the government is still chasing the targets set by FRBM Act, one can definitely dive into the opportunities underlying a larger Fiscal Deficit.


Mehak Jain, Financial Planning & Analysis, ABP Network


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