The committeee had suggested a fiscal deviation band of 0.5% to deal with unforeseen events, and enacting a new Debt and Fiscal Responsibility Act.
Workers hold iron rods at the construction site of a bridge on the river Tawi in Jammu. Credit: Reuters
New Delhi: It’s official now. The government will not be able to meet its fiscal deficit target of 3.2% for the current fiscal. In the 2018 budget, finance minister Arun Jaitley on Thursday revised the fiscal deficit target for 2017-18 to 3.5%, the same as last year. The fiscal slippage is unlikely to go down well with foreign investors and multilateral funding agencies. It could also raise borrowing costs for the government and Indian companies in the overseas market.
The government had earlier scotched market speculation over possible fiscal slippage by reaffirming that it was committed to following fiscal prudence. However, it has failed to keep its word.
The government’s failure to stick to the medium-term fiscal consolidation roadmap is even more startling considering it has raised Rs 1 lakh crore via disinvestment, exceeding the target of Rs 72,500 crore. This was made possible by the controversial ONGC-HPCL merger, which will yield nearly Rs 37,000 crore.
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But the financial jugglery has not been able to prevent a loss of face for the government on the fiscal front.
While the deal has provided a fiscal cushion to the government, it has also forced ONGC, which has been debt-free till now, to borrow more than Rs 20,000 crore from the market.
ONGC’s mandate is to ensure the energy security of the country through exploration and production of oil and gas domestically and the acquisition of hydrocarbon assets abroad via ONGC Videsh – its 100% subsidiary. ONGC Videsh has been using the parent company’s clean balance sheets to raise cheaper funds from the market to finance its acquisitions. But the cost of funds could now go up for the subsidiary.
Broken promises
Jaitley had set the fiscal deficit for 2017-18 at Rs 5,46,532 crore while presenting the budget on February 1 last year. However, it is now projected to go up to Rs 5,97,769 crore.
The government had targeted to trim its fiscal deficit to 3.2% in 2017-18, from 3.5% in 2016-17, as part of its medium-term fiscal consolidation strategy. The government had assured investors that, come what may, it would stick to the target.
In 2015, while outlining the NDA government’s fiscal consolidation strategy, Jaitley had promised to get back to a 3% fiscal deficit by 2017-18. As recently as November, Jaitley had assured foreign investors in the US that the NDA government would stick to its committed fiscal deficit target.
Most analysts had expected the fiscal deficit to be set at 3.2% in 2018-19, but that target has now been set at 3.3%.
Flexibility for deviation
Most likely, the government is gearing up to hide behind the recommendations of the N.K. Singh committee which had suggested a fiscal deviation band of 0.5%. This means that the government can deviate by 0.5% from the fiscal deficit target if the economy is in slowdown. The flexibility has been allowed for the government to create space for stimulus to pump-prime the economy.
On the other hand, when the economy is doing well, the deficit can be compressed by 0.5%.
The flexibility for deviation has been recommended by the panel to deal with unforeseen events such as war, calamities of national proportion, collapse of agricultural activity, far-reaching structural reforms, and a sharp decline in real output growth of at least three percentage points.
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The committee has recommended enacting a new Debt and Fiscal Responsibility Act after repealing the existing Fiscal Responsibility and Budget Management (FRBM) Act, and creating a fiscal council. The proposed three-member fiscal council would prepare multi-year fiscal forecasts for the central and state governments and provide an independent assessment of the central government’s fiscal performance and compliance with targets set under the new law.
The committee has favoured a debt-to-GDP ratio of 60% for the general government by 2022-23, 40% (38.74%) for the central government and 20% for state governments. Within that framework, the panel has recommended adopting the fiscal deficit as the key operational target consistent with achieving the medium-term debt ceiling, at 3% of GDP for three years, between 2017-18 and 2019-20. Revenue deficit-to-GDP ratio has been envisaged to decline steadily by 0.25 percentage points each year from 2.3% in 2016-17 to 0.8% in 2022-23.
The panel’s recommendations have not yet been officially accepted by the government, but now that it has breached the deficit target, it is likely to formally accept the panel’s recommendations to save face.
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