India ' s Gross Fiscal Deficit to Exceed Target

According to the analysis of the budget documents of States by HSBC Global Research, India’s Fiscal gross fiscal deficit for 2015-16 is expected to be around 6.9 per cent of GDP larger than the estimated(budgeted) 6.3 per cent.

What is Fiscal Deficit?

Fiscal deficit is when a government’s total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit does not mean debt, which is an addition of annual deficits.

Simply put, Fiscal Deficit = Total Expenditure ( Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Recoveries of Loans + Other Capital Receipts (all Revenue and Capital Receipts except loans taken))

Gross Fiscal Deficit (GFD) of government is the surplus of its total expenditure, current and capital, as well as loans net of recovery, above revenue receipts (including external grants) and non-debt capital receipts.

India’s fiscal policy framework

Here are some interesting facts about India’s fiscal policy agenda:

• Indian Constitution has provided directives for the formation of a Finance Commission (FC) every five years.
• This is to provide the basis for this assignment of some of the centre’s revenues to the state governments and provide medium term direction on fiscal matters, as taxing capacity of the states are not necessarily proportionate with their spending responsibilities.
• The Budget where the government shall put before the parliament an account of its proposed taxing and spending provisions for legislative debate and approval is also an important part of fiscal policy.
• The Five year plans are an integral part of the fiscal policy agenda and is monitored by the Planning Commission for achieving the country’s long-term economic objectives.
• Direct taxes like income tax, wealth tax and so on are under the purview of the Income Tax Act of 1961 whereas Indirect taxes like sales tax and excise duty would be under the proposed Goods and Services Tax(GST).
• The Fiscal Responsibility and Budget Management Act (FRBMA) 2003 is an Act concerned with fiscal discipline.

Fiscal Consolidation in India

Fiscal Consolidation refers to the treatment of a group of entities as one entity for taxation purposes. Simply put, the parent entity would  be accountable for the entire group’s tax liabilities. Here are some facts about Fiscal consolidation in the country:

• The Thirteenth Finance Commission (13th FC) in its report suggested need to return to the path of fiscal caution and designed a road map showing a collection of intended fiscal deficit targets.
• The Budget of 2011-12 aimed at conforming both direct and indirect tax policy with medium term objectives of fiscal consolidation.
• The Budget of 2011-12 proposed adoption of key fresh tax legislations; the Direct Tax Code (DTC) for direct taxes and the Goods and Services Tax (GST) for indirect taxes .
• Policy documents like the 12th Plan Approach Paper and the government’s Fiscal Policy Strategy Statement of 2011-12 appear to indicate that the fiscal consolidation is well institutionalized in the country’s policy establishment (as per Planning Commission and Ministry of Finance).

How India’s Fiscal Deficit might exceed target?

Analysis of the budget documents of States by HSBC Global Research

• Estimates that the Gross Fiscal Deficit for all States will be 2.7 per cent of GDP, wider than the government’s estimate of 2.3 per cent.
• The study is based on the budget projections of 18 States, which in total falls just below 80 per cent of India’s economy.
• The fiscal deficit is due to the rapid fall in oil prices and the resulting drop in state governments’ value-added-tax collections.
• The State governments would have to bear the double burdens of the wage hikes following the awards of the pay commission and the interest bill on UDAY (Ujwal DISCOM Assurance Yojana) bonds this year.
• The GDF might slip this year to 2.9 per cent against the government’s estimate of 2.6 per cent.
• As per the study estimates , it might cost States 0.1 per cent of GDP in 2016-17 as interest payments.
• Six of the eighteen States including Andhra Pradesh and Haryana have provided for wage hikes in their fiscal accounts.

How the government finances the GDF

• As per the RBI, States borrowed a total of Rs.2.95 lakh crore last year, close to half of the gross borrowings of the Centre, of Rs. Six lakh crore and further borrowings are expected in the current year.

• The Centre has opted to retain the 3.5 per cent target, as per the Fiscal Responsibility and Budget Management (FRBM) roadmap in the Union Budget, in order to accommodate the expected increase this year in the States’ borrowing needs.

The Lower levels of government borrowings can bring down borrowing costs for all borrowers, both government and private which would trigger the investments cycle and spur growth as the money used for funding cannot be used for making private investments. Else the private sector growth would be hindered owing to the rise in interest rates due to lack of availability of funds.