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Fiscal Deficit: Fiscal deficit in a pandemic year: How big a concern is it?


India has for long grappled with the issue of reducing its fiscal deficit or the difference between the government’s total receipts and expenditures for a given financial year.

While what makes for an “optimal” fiscal deficit remains a debated matter between fiscal hawks and doves, the figure has been on the downtrend for the last couple of years and has largely stayed within the target, albeit a revised one.

However, this trajectory changed abruptly with the Centre’s fiscal deficit shooting up to 4.6% of gross domestic product (GDP) against an upwardly revised target of 3.8% in FY20, the first fiscal under the Modi 2.0 government.

The last time the deficit ran over the budgeted amount to such a large extent was in FY12 when the figure came in at 5.76% against a targeted 4.7%.

The sharp rise in the deficit recorded in the previous fiscal was caused by an equally sharp decline in the Centre’s revenues as the pace of GDP growth slid to an 11-year low of 4.2% coupled with limited scope for expenditure compression.

While it may be a matter of simple arithmetic, an elevated deficit has large and long-lasting implications on many other factors of the economy, which is why rating agencies and governments alike ascribe so much importance to it.

A high fiscal deficit implies a higher level of government borrowing which increases the country’s debt obligations thus affecting the quality of public expenditure while putting upwards pressure on G-sec yields to name a few.

During the presentation of the Union Budget 2020-21 in February last year, finance minister Nirmala Sitharaman had invoked the escape clause in the amended Fiscal Responsibility and Budget Management Act to increase the deficit target by 0.5% for FY20 and FY21 each.

The consolidation roadmap presented at the time extended the target of reining in the deficit at 3% to FY24 while projecting the deficit at 3.3% and 3.1% in FY22 and FY23, respectively.

The pandemic has rendered these calculations completely impractical while exacerbating many of the issues that had led to the pre-pandemic slowdown such as falling private consumption and investment demand.

As of November last year, the deficit surpassed the target by 35%, with experts and rating agencies pegging the Centre’s deficit in the current fiscal anywhere between 6-9% while acknowledging the limited scope for consolidation in FY22 as well.

NK Singh, chairman of the 15th Finance Commission, which was charged with drawing up a path for fiscal consolidation over the coming five years, has advocated for a fiscal deficit range rather than a specified target going forward.

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