Govt invokes clause in FRBM Act to raise fiscal deficit target to 3.8% from 3.3%

For the next year, the government is relying heavily on non tax revenue – for example, target for disinvestment receipts is up more than three times at record Rs 2.1 lakh crore in 2020-21 – to bridge the revenue gap.

Written by Aanchal Magazine

New Delhi | Updated: February 2, 2020 08:47 AM IST

5 min read

Macroeconomics, GDP, rural bank credit growth, urban bank credit growth, passenger vehicle sales, two-wheeler sales, government capital spending, maharashtra, Mumbai News, Indian Express

According to data released by the Controller General of Accounts (CGA) on Friday, the fiscal deficit — or gap between expenditure and revenue — in absolute terms was Rs 5,47,605 crore at the end of July. (Representational)

Falling tax and non tax revenues has put a strain on government finances, forcing it to cut expenditure and breach the fiscal deficit target for the third year in a row even as it stopped short of bringing all of the government’s off-budget borrowings to the book. For the next year, the government is relying heavily on non tax revenue – for example, target for disinvestment receipts is up more than three times at record Rs 2.1 lakh crore in 2020-21 – to bridge the revenue gap.

Even as the government is projecting spending to rise next year, in the current year, it slashed spending by as much as Rs 87,797 crore from the budget estimate to ease the fiscal strain. With economy facing slowdown in investment, net exports and private consumption, government spending is the only engine which is supporting growth. Total expenditure, therefore, is pegged to rise by 12.7 per cent in 2020-21 to Rs 30.42 lakh crore – a rise of Rs 3.43 lakh crore over 2019-20 revised estimate.

Capital expenditure is set to rise 18.1 per cent to Rs 4.12 lakh crore in budget estimate for 2020-21 over 2019-20 revised estimate. The gross tax revenue is anticipated to grow at the rate of 12.3 per cent in 2021-22. As a result of these factors, the Budget announced a marked deviation from the fiscal consolidation roadmap, though it stopped short of bringing all of the government’s off-budget borrowings to the book. The government breached the fiscal deficit target by 0.5 percentage points to 3.8 per cent of GDP for 2019-20. For the next financial year, it is pegged at 3.5 per cent of the GDP as against the earlier estimate of 3.4 per cent.

Read | Govt maintains protectionist stance; hikes import duties on over 100 categories of products

The government slipped from the fiscal consolidation roadmap owing to a shortfall of Rs 1.45 lakh crore in tax collections and a Rs 40,000 crore shortfall in disinvestment receipts. Direct tax collections for the current fiscal fell short of the budget target by Rs 1.65 lakh crore.

Explained

Move in line with FRBM Act

Nominal GDP growth for 2019-20 has been estimated at 7.5 per cent, lower than 11.2 per cent growth in 2018-19. A projection of 10 per cent has also been made for nominal GDP growth for 2020-21.

For the next financial year, the government has pegged an ambitious disinvestment target of Rs 2,10,000 crore. government’s non-tax revenues are estimated to rise by 11 per cent to Rs 3.85 lakh crore, while tax revenues are estimated to rise by 8.7 per cent to Rs 16.35 lakh crore in 2020-21. The government has budgeted for lower dividends from the RBI and state-owned banks in 2020-21, expecting to earn Rs 89,600 crore from the Reserve Bank of India, banks and financial institutions, down from Rs 1.52 lakh crore for the current year.

Story continues below this ad

Finance Minister Nirmala Sitharaman in her Budget 2020-21 speech said that the expected “tax buoyancy will take time”, adding that the deviation from the fiscal deficit consolidation roadmap is in line with the 0.5 per cent escape clause provided in the Fiscal Responsibility and Budget Management (FRBM) Act.

“Section 4 (2) of the FRBM Act provides for a trigger mechanism for a deviation from the estimated fiscal deficit on account of structural reforms in the economy with unanticipated fiscal implications. Therefore, I have taken a deviation of 0.5%, consistent with Section 4(3) of FRBM Act, both for RE 2019-20 and BE 2020-21,” she said.

Also Read | Finance Commission recommends 41% share of taxes for states; 1% for J&K, Ladakh in FY21

Sitharaman further stated that this fiscal path is a commitment to the path of fiscal consolidation “without compromising the needs of investment out of public funds”.

Story continues below this ad

The net market borrowings would be Rs 4.99 lakh crore in financial year 2019-20 and are estimated at Rs 5.36 lakh crore in the next fiscal. The Finance Minister said “a good part” of the borrowings for the financial year 2020-21 would go towards capital expenditure of the government that has been increased by over 21 per cent and would help to boost growth. “…another about Rs 22,000 crore have been allocated for equity to fund certain specified infrastructure finance companies, who would leverage it manifold and provide much needed long-term finance to Infrastructure sector. That should spur growth impulses in the economy,” she said.

The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines

Aanchal Magazine

Aanchal Magazine is Senior Assistant Editor with The Indian Express and reports on the macro economy and fiscal policy, with a special focus on economic science, labour trends, taxation and revenue metrics. With over 13 years of newsroom experience, she has also reported in detail on macroeconomic data such as trends and policy actions related to inflation, GDP growth and fiscal arithmetic. Interested in the history of her homeland, Kashmir, she likes to read about its culture and tradition in her spare time, along with trying to map the journeys of displacement from there. ... Read More

Tags:

Budget 2020 Union Budget 2020