Widening gap of fiscal deficit

In further gloomy news to the end the year, the fiscal deficit for the year 19-20 has further widened from the annual target of Rs 7.04 lac crores as of the first 8 months of the year, according to figures released by the finance ministry. The fiscal deficit as of end of November stands at Rs 8.07 lac crores and now stands at 114.8% of the government’s budget estimate for the current financial year. In the corresponding period of the previous year the fiscal deficit stood at Rs 7.17 lac crore.

Fiscal deficit typically tends to pick up in the last quarter of the FY when tax revenue gets a boost. However with lower tax collections this year and reduction in corporate tax, meeting the target will be a challenge.

Meanwhile India Ratings & Research (Ind-Ra) has stated that aggregate fiscal deficit of the state’s for the current financial year is likely to reach 3% of GDP as against a budgeted target of 2.6%.

According to the unaudited finances of 23 states, fiscal deficit for April-October stood at 49.6 percent of the FY20 budgeted deficit compared to 39.5 percent a year ago. Based on the current tax growth, the ratings agency said, the overall shortfall in states’ revenue could touch Rs 39,032 crore in 2019-20.

The Indian economy is facing a slowdown with the growth rate declining consistently. There has been significant reduction in rural demand. In a slowdown period typically government expenditure is supposed to rise specifically when this is a demand driven slowdown. This should have an impact on fiscal deficit and the government also should ideally be loose on fiscal targets in such slowdown scenarios.

The Indian Government announced a decline in corporate tax rates. This has a significant impact on the revenue side and hence impacts the fiscal deficit detrimentally. But government expenditure to boost up demand fruitfully is yet to be seen. Before the elections the government announced PM-Kisan scheme with direct transfers to certain farmers. But as experts say more steps are required to boost up demand. There are some examples like package for real estate. But then that is in a sector which already lacks demand and government package that was given for real estate sector was more in the supply side.

As a new year dawns, IPD sincerely prays and hopes that it brings good news for the economy.

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