The government has announced that it would borrow an additional Rs 50,000 crore. Will this increase the fiscal deficit, beyond its target of 3.2% of GDP for the current financial year? What does the government plan to do with the money? Will it go to pay for outstanding dues on revised pay for civil servants? Or will it fund extra route-km of national highways or higher support prices for farm produce?
These questions should have been rendered superfluous. The government should have come out with credible communication on all these and other matters, while announcing the additional borrowing.
Overshooting a fiscal deficit target might or might not be a sin, depending on how much of non-government savings are available for the government to tap without creating excess demand and the intended purpose of the extra borrowing.
The point is to make things clear without allowing uncertainty to build up in the market. If T-Bills are replaced with dated securities, that is, very short-term debt is replaced with longer-term debt, it might appear that there is no net addition to borrowing and so the fiscal deficit would not be impacted.
However, since T-Bills are to be settled within the year, they are not counted while toting up the fiscal deficit. So, other things remaining the same, the fiscal deficit would go up — of course, there would be a minor saving on the interest outgo on the replaced T-Bills, as interest on dated securities would be paid only in the next fiscal.
But other things need not remain the same. Tax collections could go up, if income-tax officials diligently follow the goods and services tax audit trail, small savings collections could be lower, disinvestment proceeds could be higher, the government could ask for special dividends from public enterprises without a clue as to how to invest their huge surpluses. The government is unlikely to curtail expenditure, however.
What is needed is clarity on the fiscal stance and its clear communication. Chicken Little would have little to fear, even if the fiscal deficit does exceed the target by a couple of decimal points.