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Tackling the fiscal deficit is a challenge
Management of fiscal deficit There has been significant improvement in macroeconomic parameters such as development, inflation, fiscal deficit and external balance etc. in the last few years. The average consumer price index (CPI) inflation, which was 9.5% in March 2013, decreased to 3.9% in FY2019. The pace of development which was slow after the demonetization and implementation of the goods and services tax (GST), it came again at 7% level. However, in the fourth quarter of fiscal year 2019, it has come down below 6%.

Financial uncertainty has increased slightly in the financial year 2019, but it lesser than fiscal year 2018. By the way, trade war between China and the United States remains a bit uncertain in the global market, but after the re-emergence of the National Democratic Alliance (NDA), the financial instability in India is expected to be reduced.

For the time being, India needs to focus on rural areas to promote economic growth. For this, the government should make arrangements provide real price of crops to farmers. By integration of the public sector banks, make the simple process of NCLT, promoting export, augmenting investment and manufacturing activities through judicial reforms, generating jobs for youths, etc. can brought economy in better position.

Financial Intelligence

The gross fiscal deficit decreased to 3.4% in fiscal year 2019 in context of GDP. In order to achieve the revised target in the financial year 2019, the government will have to cut spending of Rs 1.45 lakh crore. There is a need to cut the subsidy amount by Rs 69,140 crore also. The total revenue receipt in this order is expected to come down to Rs.1.57 lakh crore.

Now the estimate of the financial year 2019 has been revised. In the financial year 2020, estimate of fiscal deficit may be higher, especially in terms of tax revenue and revenue expenditure. Annual growth rate of tax for the financial year 2020 is now 29.5%, which is much higher than the decade growth rate of 12.5%. At the same time, the growth rate of revenue expenditure is 21.9%, which is higher than the decade growth rate of 9.2%. It appears that these estimates can be revised in the full budget which is going to be presented on July 5, 2019. There is a possibility of revising the fiscal deficit target of 3.4% of the GDP in the financial year 2020.

In advanced countries, despite adopting strong measures, the government debt is increasing, while government debt in India has declined in the last few years. In 2008, the government loan was 50.5% of GDP, which decreased to 45.6% of GDP in fiscal year 2018. The fiscal responsibility and budget management (FRBM) committee has been targeted to bring fiscal deficit to 3% level by the year 2021. Fiscal sense is the prerequisite for maintaining financial stability, but this measure is not enough to achieve the expected target.

At present, India is paying more attention to indirect tax rather than direct tax. However, hope that India will not take stern steps to achieve the goal of fiscal deficit.

Non-Tax Revenue Receipts

The government is using non-tax revenue tax to meet the fiscal deficit. However, the analysis of data from fiscal year 1972 to fiscal year 2017 shows that neither tax revenue growth influences the GDP growth rate nor does the increase in GDP affect the non-tax revenue growth rate. Of course, the government should not rely on non-tax revenues, because high non-tax revenue growth is likely to cause regional imbalance.

Under other options for achieving the fiscal deficit target, India should target structural deficits like other developed economies and emerging economies. Since there is no informal relationship between non-tax revenue and gross GDP, therefore, disinvestment receipts, including non-government revenue, such as telecom spectrum auctions, should be kept separate while calculating the government surplus amount. For example, in the year 2010, the telecommunication spectrum was auctioned on a widespread scale in India and in fiscal year 2011 there was a large amount of revenue received from disinvestment. If these two receipts are separated from the calculation then the structural fiscal deficit will increase from 4.8% to 6.1%. Significantly, the International Monetary Fund (IMF) also adopts the policy of structural fiscal deficit. According to the report of the FRBM Committee, achieving structural balance for emerging economies, including India, is not easy.

Considering the decline in India's growth rate, the question arises whether the government should focus on fiscal consolidation before reducing the fiscal deficit target. Another option is to keep the deficit figure unchanged before the reduction of the deficit. In the current scenario, policy makers should try to make country-friendly fiscal rules, which are reliable and transparent. Also, the government should determine such a goal, which is possible to be achieved.

About the author: Satish Singh is currently working as Chief Manager in State Bank of India's Economic Research Department, Corporate Centre, Mumbai, and has been writing mainly on financial and banking topics for the last 10 years.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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