The Centre has overshot its budgeted fiscal deficit marginally this fiscal, with the revised estimate at 3.4% of GDP against the budget estimate of 3.3% of GDP. There is no cause for immediate alarm as investment activity is still low, making non-government savings available for the government to tap without creating excess demand that feeds into inflation. However, the government must be vigilant and have a credible plan to lower fiscal deficit, given that an increase in the deficit when investment picks up will create inflationary pressures. Already, the Centre has pushed back the goal of a 3% fiscal deficit to 2020-21. A slippage at the state level due to loan waivers and taking on the debt of bankrupt electricity boards is likely to push up the combined Centre-state fiscal deficit close to 8% of GDP.
The Centre’s fiscal deficit for 2018-19 is probably understated. It does not take into account the servicing of the debt of state undertakings serviced entirely from the budget, according to the Medium-Term Fiscal Policy Statement. The last-minute increase in GDP estimates, which might well be revised downward subsequently, would also tend to show a rosier picture on the fiscal front. Fiscal deficit in 2019-20 is also budgeted at 3.4% of the GDP, taking into account the full fiscal impact of the income support scheme. The revenue estimates that include divestment receipts are iffy. Added to this, state finances are in a bad shape. The Reserve Bank of India report on state finances showed a deterioration in the gross fiscal deficit to gross domestic product ratio in 2017-18, crossing the Fiscal Responsibility and Budget Management threshold for the third consecutive year.
GST yields rich data that must be mined to identify income that evades tax. Every effort must be made to plug leakage.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
via Case for vigilance on the fiscal front