Scramble To Meet Fiscal Deficit Target Caps Volatile Year For Government Finances
The government has scrambled over the last few weeks to close divestment deals, raise funds through exchange-traded funds, and push tax agencies to step up their collection efforts. All this in an effort to meet a once-revised fiscal deficit target of 3.4 percent of GDP.
While meeting fiscal deficit targets has often been a challenge in the past, the last two years has seen the government push things down to the wire.
Until February this year, the government was running a fiscal deficit of 134.2 percent of the revised target. According to data by BloombergQuint, this is the highest in at least a decade and even higher than last fiscal year, when the introduction of the goods and service tax had led to understandable volatility in tax collections. The data is based on information available on the website of the Comptroller and Auditor General.
The government has also front-loaded expenditure over the last two years. This has meant that as early as mid-year, the government has seen its actual fiscal deficit hit more than 90 percent of the target.
Dharmakirti Joshi, chief economist at Crisil said this volatility could recede once the new indirect tax system stabilises . He said the higher volatility needs to be viewed along with lower fiscal deficit as a percentage of the GDP.
Fiscal management has changed under the current government, said Radhika Pandey, consultant at the National Institute of Public Finance and Policy. “Though fiscal deficit is intrinsically characterised by expenditure and revenue mismatches over the course of the year, expenditure has surged but revenue has been sticky despite ambitious targets,” she said.
Pandey added that the last minute rush to meet fiscal deficits adds to volatility in the markets. She, however, said that eventually what matters in the final fiscal deficit.
An analysis of the proportion of fiscal deficit used-up in the fourth quarter of each financial year shows that the current administration has often relied on last minute adjustments to meet the fiscal deficit. While some of this may happen through a legitimate push for divestment receipts, imprudent practices like pushing subsidy arrears to the next year have also picked up.
These practices had been red-flagged by the Comptroller and Auditor General in a report in January. “The government adopted off-budget means of financing the subsidy arrears, thereby deferring the payment in the relevant financial year and in the process also incurring additional cost by way of interest payments,” the CAG said while noting that there was some understatement of fiscal deficit due to these practices.
This year the government has used interim dividends to fill the budget gap.
In particular, the RBI transferred a Rs 28,000 crore interim dividend to the government to help it meet its revised fiscal deficit target. Recent disclosures to stock exchanges show that public sector enterprises like Coal India, Indian Oil Corporation and ONGC have paid out second interim dividends to the government.
Referring to the practice of seeking an interim dividend from the RBI in particular, former Reserve Bank governor YV Reddy said this is against the principle of ‘ways and means advances’. Such interim dividends contradict the spirit of putting in a limit on ‘ways and means advances’ which are intended to meet any short-term funding mismatch that the government faces, Reddy said in a speech in early February.
Ways and Mean Advances (WMA) are temporary loan facilities provided to the government to enable it to meet temporary mismatches between revenue and expenditure. Data collated by BloombergQuint shows that the government has used this facility far more frequently in the last two years compared to earlier years. While this short term credit gets repaid within 90 days, increased use of the facility does show that the government has been facing cash-flow mismatches, said a senior economist who spoke on condition of anonymity.