The fragile nature of the Centre’s finances and its level of control over interest, pension and subsidy expenses are a cause of concern.
This article discusses the multiple facets and consequences felt due to budget deficits and burden of mounting government debt.
How does the estimated deficits for FY-18 fare?
The estimated income for the FY18 fiscal from tax, non-tax revenues and capital items is Rs. 16.23 lakh crores.
But the expected expenditure is Rs. 22.17 lakh crores, which overshoots income by as much as 36.5%, and leaves a shortfall of Rs.5.94 lakh crores.
This shortfall when expressed as a percentage of GDP (which is around 167 lakh crores) is called fiscal deficit, which only displays a modest number.
Further, fiscal deficit counts both recurring revenue income and capital receipts (which are a one-time thing) as part of the government’s income.
Even if revenue items alone are counted, the Centre is still spending more than it earns, with revenue deficit of Rs. 4.39 lakh crore (FY18 estimate).
Why are deficits bad?
When the Centre ends up spending more than it earns, it takes recourse to market borrowings to bridge the gap.
The borrowing target is closely watched by the bond market because the government’s appetite for money might crowd out other borrowers.
Hence, companies, small businesses, and individuals would find it difficult to raise funds from India’s relatively shallow financial/bond market.
Many years of such extravagant spending has resulted in the mounting of government’s debt, which currently hit 82.32 lakh crores (49.3% of GDP).
Notably, this has grown form Rs. 57 lakh crore five years ago.
The only positive is that the bulk of those loans are from domestic sources, with just Rs. 2.4 lakh crore owed to foreign lenders.
What is worrying about the budget allocation patterns?
While various schemes are highlighted in the budget speech, the bulk of the expenditure each year goes to - interest payments, pensions and subsidies.
In the FY18, interest payments (largest header) was expected to absorb Rs. 5.3 lakh crore, pensions Rs. 1.5 lakh crore and subsidies Rs. 2.3 lakh crore.
In short, servicing interest payouts alone will take up 32% of the Centre’s earnings this year, while pensions and subsidies absorb another 23%.
With 23% allocated to State grants and 16% to defence expenditure, these repetitive expenses will effectively mop up 95% of the total Budget receipts.
These trends holds good across years and for all long-standing fiscal issues, leaving little room in the annual Budget for new schemes.
Another long-time issue is that the bulk of the Budget spending goes into maintenance expenses, and little remains for creation of new assets.
In FY18, just 12% of the budget was defrayed in capital spending.
What is desired?
Fiscal Responsibility and Budget Management (FRBM) Act mandates the government to steadily tighten its fiscal and revenue deficits over the years.
It also envisions reining in its debt-GDP ratio by establishing a targeted outlay.
For the government to be really able to launch bold new schemes, it needs to clean up its finances first — pare down debt, save on interest payouts.
Reducing pensions and subsidies and raising asset creation are also important.
It is also important to ensure that receipts grow at a far faster pace than expenses in future, so that the debt can be paid down.
Therefore, the success or failure of the annual Budget exercise really has to be measured on the progress in these parameters over the years.
How has the fiscal consolidation progressed since the NDA takeover?
Since 2o14, Centre’s receipts have grown at a faster pace than its expenditure, which has helped the centre avoid a big bloat in the fiscal deficit.
While total receipts (excluding borrowings) have shot up by 50% in the last 4 years, the expenditure in the same period registered a slower 39% increase.
Further, spending on interest, pensions and subsidies rose by a much lower 30%, thus freeing up room for other expenditure.
Over the years, fiscal deficit as a percentage of GDP has come down from 4.5% to 3.5% in the current fiscal.
But all this thrift has made only a mild dent in the Centre’s stockpile of debt, which has dipped merely from 50.4% to 49.3% of GDP over four years.
The progress achieved so far is hence miniscule and the government needs to persist ahead with fiscal prudence and resist populist temptations.
