Budget 2019: Nirmala Sitharaman’s promise to cut fiscal deficit to 3.3% of GDP is brave, but not realistic

That women are better at balancing the household budget than men is a truism that has been more or less accepted. There are exceptions to this, but it appears that Nirmala Sitharaman is not one of them. In her maiden budget, she is promising to keep the fiscal deficit at 3.3 percent of GDP, lower than the 3.4 percent projected in the interim Budget presented by Piyush Goyal. She has also promised that the fiscal deficit will come down to 3 percent in 2020-21 and will remain at that level in 2021-22 as well.

To that extent, she deserves the applause that is coming her way for presenting a fiscally responsible Budget. It would not have been an easy choice to make—there must have been a lot of pressure to go easy on fiscal consolidation in order to get growth going once again.

After that applause, a more closer look is warranted in order to (a) look at the quality of the deficit, and (b) how realistic the assumptions underlying the 3.3 percent figure are. (One caveat is necessary at this point: the actual fiscal deficit will actually be higher because successive governments have been delaying payments they were due to make in order to show better numbers. A case in point is payments to the Food Corporation of India—every year the government holds back some of the subsidy it has to pay. In 2016-17 (the last date for which figures are available, it paid only 48.8 percent of the subsidy due to FCI.  There are other cases like this.)

Quality of deficit really means a higher fiscal deficit can be condoned if more of the borrowed money is going toward capital expenditure than revenue expenditure. Simply put, money is being used for asset creation than day-to-day expenditure. One way of assessing the quality of the deficit is to look at how much of the fiscal deficit is accounted for by the revenue deficit. Seen in this light, there are some worrying signs in the deficit numbers this year.

The fiscal deficit may have been brought down from 3.4 percent to 3.3 percent between the interim and full budgets, but the revenue deficit has gone up—from 2.2 percent of the GDP (in both the revised estimates of 2018-19 and the Budget estimates of the interim Budget) to 2.3 percent of GDP. Look also at the percentage of revenue deficit in the fiscal deficit—it has gone up from 64.7 percent in the 2018-19 RE to 68.9 per cent in 2019-10 BE (even in the interim Budget, the share of the revenue deficit in the fiscal deficit was 66.7 percent).

Leave a Reply

Your email address will not be published. Required fields are marked *