Why the Fiscal Deficit May Not Be a Cause for Concern?

The Union Budget 2018 presented by Arun Jaitley was in the strict sense of the word a macro budget. It takes a look at the big picture and focuses on the larger aspects like the farm distress, the MSME sector, rural purchasing power, middle class and the senior citizens etc. It may be recollected that the government had already touched 112% of the projected fiscal deficit for the full year 2017-18 by the end of November 2017. Considering that, the spillage in fiscal deficit target was just to the tune of 30 basis points instead of 50 basis points as was originally anticipated. Also the government has managed to project a very conservative fiscal deficit of 3.3% for the fiscal year 2018-19 which again represents a spillage of just 30 basis points over the original FRBM commitments. So for the fiscal year 2017-18 India is looking at a fiscal deficit target of 3.5% instead of the originally planned 3.2%. But is this a cause of worry?

Not exactly a worry, look at the revenues…

Here are some key pointers on the revenue front that underscores that the fiscal deficit spillage of 30 points is more a temporary measure…

• In the current fiscal 2017-18, the government is likely to end up with disinvestment revenues of Rs.100,000 crore as against the original target of Rs.72,500 crore. For the fiscal year 2018-19, the government has proposed a divestment target of Rs.80,000 crore. With 24 PSEs slated to be disinvested and the Air India restructuring also to take place, one can conservatively estimate the disinvestment revenues to exceed Rs.100,000 crore in the current year. That will give a cushion to the government.
• There is tremendous buoyancy on the tax front. There has been an 18.6% growth in direct revenues as of Jan 2018 and the number of tax payers has gone up by nearly 25%. The real benefits of this growth will be visible in the coming year. Also GST buoyancy will be more visible in the coming year and that will be another key takeaway for the revenues. Hence there is not much of a worry on the revenues front. Also the higher customs duty announced is likely to be a positive for the full year revenues next year.

Fiscal deficit is driven by productive investments…

That could be the bigger takeaway as far as the fiscal deficit is concerned. A large chunk of the fiscal deficit is going into big ticket investments. Consider some of these data points…

• The government has assured an MSP at 1.5 times the production cost and that is likely to have a positive impact on farm incomes and rural spending power. That will have important takeaways for sectors like FMCG, consumer durables, agricultural inputs etc. The total credit to agriculture is also being enhanced to Rs.11,00,000 crore.
• The government has also announced railway sector capex of Rs.148,000 crore for the year and a chunk of that will go into renewal of infrastructure and safety. Additionally, the government proposes to bring 10 crore families within the health cover and that will largely increase the risk taking capacity of these families.
• The rural livelihood plan of Rs.14,34,000 crore is also going to be a big boost to rural demand as well as spending power. That will also go down as a positive for the economy as a whole.
• The government has already fast tracked infrastructure projects worth Rs.9.46 trillion and that trend is only going to grow in the coming year. All these are likely to be net positives for the economy as a whole. The completion of 9000 KM of roads in this fiscal is another big positive and that is likely to be further enhanced in the coming year.

Following a counter cyclical approach to fiscal deficit…

The government is right in that it is adopting a counter cyclical approach to fiscal policy. It is when government intervention is required that it really needs to intervene and let the fiscal deficit expand that little bit. A 30 basis points increase in the fiscal deficit is nothing to really worry about. In fact, if the stock market bounce from lower levels is any indication, it is actually likely to be growth accretive for the Indian economy.