A man climbs a flight of steps at the North Block of the Central Secretariat building (Photographer: Prashanth Vishwanathan/Bloomberg)

Union Budget 2018: FY19 Fiscal Deficit Set At 3.3%

The Indian government will target a fiscal deficit of 3.3 percent of GDP for 2018-19, Finance Minister Arun Jaitley said in his budget speech on Thursday. The government also said that the fiscal deficit for 2017-18 is likely to be higher at 3.5 percent compared to the targeted 3.2 percent of the GDP.

The markets have been widely anticipating a fiscal deficit number higher than the 3 percent target set under the FRBM (Fiscal Responsibility and Budget Management) Act. The government had already pushed back that 3 percent target by a year from FY18 to FY19.

The government will plan to borrow Rs 6.06 lakh crore from the markets, Bloomberg News reported. This is lower than the expected Rs 6.5 lakh crore. Bond yields rose above 7.5 percent despite the lower than expected borrowing.

The fiscal deficit has been set at a reasonable target given the circumstances in which the economy is, said C Rangarajan, former governor of the Reserve Bank of India. He, however, acknowledged that the government’s inability to meet the 3 percent target year after year dents the government’s credibility.

In some sense, yes, reverting back to 3.5 percent (fiscal deficit) in the current year does create some doubts. But, hopefully, if the 3.3 percent assumed for FY19 actually turns out to be that, then perhaps the credibility can be restored.
C Rangarajan, Former Governor, Reserve Bank of India

The medium term fiscal statement released by the government on Thursday showed that it is now attempting to bring down the fiscal deficit to 3 percent of GDP only by FY21.

The revenue deficit target for FY19 is set at 2.2 percent and will be brought down to 1.6 percent by FY21.

Union Budget 2018: FY19 Fiscal Deficit Set At 3.3%

Details Of FY19 Finances

Budget documents showed that the government is budgeting for a 16.7 percent increase in its gross tax revenue.

  • The gross tax revenue is expected to increase to Rs 22.7 lakh crore compared to a revised estimate of Rs 19.4 lakh crore. This implies a growth of 16.7 percent over the revised estimate.
  • As a percent of GDP, gross tax revenue is expected to be 12.1 percent compared to the 11.6 percent revised estimate for 2017-18
  • The net tax revenue to the center is pegged at Rs 14.8 lakh crore compared to a revised estimate of Rs 12.7 lakh crore.
  • Total expenditure for FY19 is pegged at Rs 24.4 lakh crore compared to the revised estimate of Rs 22.1 lakh crore. Both these figures are inclusive of the expenditure as a result of the GST Compensation to the States.
  • Capital expenditure is estimated to increase to Rs 3 lakh crore in 2018-19 compared to a revised estimate of Rs 2.73 lakh crore in 2017-18. That’s a marginal increase of 8.1 percent.

New Fiscal Roadmap

The government also said that it would accept the recommendations of the NK Singh committee to reduce the central government debt to GDP ratio to 40 percent by FY 2023 and the general government debt to GDP ratio to 60 percent.

Last year, a committee headed by NK Singh had suggested a new fiscal consolidation road map. That required the government to bring down the fiscal deficit to 2.5 percent by FY23. It had also proposed an escape clause of 0.5 percent of the GDP, which would be available to the government at times of severe external stress or structural changes. Finance Minister Jaitley did not say whether the recommendations have been accepted in their entirety.

The Backdrop

The government’s finances came under pressure in 2017-18 due to the implementation of the Goods and Services Tax. Volatility in revenue combined with a front-loading of spending led the government to hit 112 percent of the target in the April-November period. Jaitley said that this year’s accounts will account for only 11 months of revenue under GST.

The Economic Survey, however, struck a hopeful note on the eventual tax collections under the GST, estimating a growth of 12 percent over indirect tax collections in the previous regime. The survey also noted that here has been a 50 percent increase in the number of indirect taxpayers.

Bond Market Reaction

The 10-year benchmark bond yield rose further after the budget was announced to 7.49 percent.

A fear of fiscal slippage, along with rising oil prices, pushed up bond yields by close to a 100 basis points over the last six months. The six-month decline in bond prices has been the longest rout seen in India since 2000, Bloomberg News reported on Wednesday. Bond prices and yields move inversely.

Bond market experts have warned that liquidity conditions this year will no longer be sufficient to support large borrowings from the centre and the states. With credit growth picking up and deposit growth declining, surplus liquidity in the banking system is being squeezed.