Fiscal Deficit Constrains for India

What is the issue?

India’s fiscal deficit is growing much than expected due to Lower revenue realisation and the rise in expenditure.
Measures needs to be taken to achieve the fiscal deficit target of 3.3% of the GDP for 2018-19 FY.

What are the measures of the government on fiscal deficit?

Union government had inherited a fiscal deficit of 4.4 % of GDP in FY14 and it was steadily brought it down to 3.5 % in 2017.
Sharp fall in oil prices and rapid economic growth helped the government to reduce the fiscal deficit between years 2014-2017.
In budget 2018-19 the fiscal deficit target has been set at 3.3%, and the target of 3% has been postponed to FY 2020-21.

What are the challenges before the government?

India's fiscal deficit till the end of November 2017 has already breached the target and touched 112 per cent of the budget estimate for 2017-18 due to higher expenditure.
The present situation is more difficult as growth faltered in FY17 and the first half of FY18 and oil prices started rising.
There is a revenue shortfall on account of lower tax collection under the GST and MSMEs are yet to picking up.

The government has a plan to raise additional market borrowings of Rs 50,000 crore through dated government securities, as a whole this may have much consequences on the fiscal targets.

What will be the consequences of rising fiscal deficits?

Higher government expenditure will push up demand and generate more money in the economy which may lead to higher inflation.
The government in order to repay its debt would likely to levy more taxes in the future.
Higher fiscal deficit also leaves little room for interest rate cuts which would affect private investments from taking off.
Borrowing costs may remain high for consumersand industry/companies which might stall economic growth

What measures needs to be taken?

Fiscal consolidation is important from the point of view of the credibility of policy-making.
Though there is an improvement in the tax to GDP ratio after the anti-tax evasion steps, gains from tax revenues was lost on account of non-tax revenues.
Framing a proper asset monetisation plan will help a lot in generating non-tax revenues as the government is among the largest owners of property and immovable assets in the world.
Thus the non-tax revenue needs to be boosted by a structured long term plan which will help in outlining the course of action and help provide predictability to the earnings from non-tax revenues.
The government need to have a strong hold on its divestment and non-tax revenue targets to achieve the fiscal deficit target of 3.3%.

Source: Business Standard, Business Times

Quick fact

Revenue receipts

Tax revenues constitute taxes like income tax, corporate tax, excise, customs, service and other duties that the Government levies.
The non-tax revenue sources include interest on loans, dividend on investments.

Sources of non-tax revenue receipts

These are not generated by taxing the public, it will be generated from profit making public enterprises (PSUs).
Interest which the Government earns on the money lent by it to external or internal borrowers.
Thus this revenue receipts may be in foreign currency as well as Indian Rupees.
The money which the government receives out of its fiscal services such as stamp printing, currency printing, medal printing etc.
Money which the Government earns from its “General Services” such as power distribution, irrigation, banking services, insurance, and community services etc. which make the part of the Government business.
Money which the government accrues as fees, fines, penalties etc. also comes under non tax receipts of the government.

Source: Business Standard