Former finance secretary Subhash Chandra Garg on Wednesday flagged under-reporting of the fiscal deficit, pegging it at 4.5-5 per cent of GDP, for FY20, including off-budget expenditure.
He argued that a large portion of the deficit is being used to finance consumption expenditure, which is typically not a healthy practice. Factoring in off-budget expenditures including for bank recapitalisation, food subsidies, irrigation schemes and sanitation schemes, Garg estimated actual fiscal deficit of the Centre at 4.39 per cent in FY18 (reported 3.5 per cent) and 4.66 per cent in FY19 (3.4 per cent). He estimates the deficit at 4.5-5 per cent in FY20 — budget estimate 3.3 per cent, which is likely to be revised to at least 3.5 per cent. Garg sees a shortfall of Rs 2-2.5 lakh crore on revenue side in FY20 and off-budget financing at Rs 1.75-2.25 lakh crore.
“In the year 2019-20, the Government has budgeted a fiscal deficit of Rs 7,03,760 crore. Expenditure budgeted as Capital Expenditure is only Rs 3,38,569 crore. It is only about 48 per cent of the fiscal deficit. As fiscal deficit represents borrowing, more than half of the borrowings, even in terms of budgeting, is meant to be spent on consumption expenditure. Almost similar was the situation in the year 2018-19 RE. Less than half of the borrowings only are meant to be used for capital expenditure. Actual position usually turns out to be still worse. In 2017-18, actual amount spent on capital expenditure was Rs 2,63,140 crore out of the fiscal deficit of Rs 5,91,062 crore which was only 44.5 per cent,” he wrote in a blog.
Garg said small savings schemes should be discontinued since they disrupted monetary policy transmission. Writing on his blog , he criticised policies relating to fiscal deficit and debt management, saying less than 25 per cent of the Centre’s annual borrowings is utilised for real capex as consumption expenditure is taking precedence. On the other hand, the headline general government (Centre and states) fiscal deficit of around 7 per cent (FY18) is higher than the net financial savings of households (6.6 per cent), forcing the private sector to look for funds overseas.
With the debt trajectory moving in the reverse direction Garg said the fiscal deficit goal of 3 per cent by FY21 is likely to be pushed to FY26 (to coincide with the new five yearly budgetary cycle with finance commission recommendations). The debt and liabilities goal of 40 per cent is likely to be pushed to FY31 from FY25, he said.
“It would be more convincing if this fiscal deficit goal is defined to include all budgetary and off-budgetary liabilities (which currently are around 4.5 per cent of GDP),” said Garg, who took voluntary retirement in October last year after he was transferred from a seemingly more powerful finance secretary to power secretary post.
If the government were to disclose and incorporate all its fiscal expenditures into the fiscal deficit and state the fiscal road map (0.25 to 0.3 per cent reduction consistently every year) in the budget, the fiscal correction and consolidation would sound more credible, he said.
Besides running smaller fiscal deficit, the system of small savings should be wind down in five years as the government has failed to enforce its policy of aligning small savings rates to the market interest rates on similar instruments, Garg said.