Demonetisation impact? Govt likely to relax fiscal deficit target | union-budget | Hindustan Times
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Demonetisation impact? Govt likely to relax fiscal deficit target

union budget Updated: Jan 29, 2017 09:51 IST
Sunny Sen

Union finance minister Arun Jaitley will present the Union budget 2017-18 on February 1.(PTI file photo)

The Narendra Modi-led government may miss its deficit goal in 2017-18, say research reports, indicating higher borrowing and spending than what was indicated during the last budget.

Fiscal deficit is the gap between the government’s revenues and its expenditure. To bridge the deficit, governments borrow from various sources – from financial institutions and the central bank through the debt market, from multilateral donor agencies through loans and from the public through savings schemes such postal deposits or provident funds.

The Budget for the financial year 2017-18 will be presented on February 1. “We think that the government will have to tread very carefully between the need for stimulating demand in a weak economic environment after demonetization and continuing on the path of fiscal consolidation. We expect the government to Budget for a fiscal deficit target of 3.3% of GDP, 30 basis points higher than planned in the government’s medium-term fiscal consolidation program,” Goldman Sachs said in its research report.

An SBI internal research report, Ecowrap, has pegged in a “fiscal deficit target of Rs 5.75 lakh crores for the financial year 2017-18, at 3.4% of GDP.” Fiscal deficit for the financial year 2016-17 is budgeted at 3.5%.

According to credit rating agency ICRA, the “government is unlikely to budget a fiscal deficit that is higher than 3.5% or lower than 3%.”

The new deficit estimated would mean the net borrowing would go up from Rs 4,10,000 crore to Rs 4.3-5 lakh crore in the coming fiscal year.To put things in perspective, the higher limit of the difference in borrowing could allow the government spend three times money it spent on its flagship rural job plan – MNREGA – last year.

The idea of controlling the deficit was former finance minister Yashwant Sinha’s, in 2001. In 2003, the Fiscal Responsibility and Budget Management Act (FRBM Act) was implemented, which aimed at keeping the deficit under 3%. It remained until 2008, and hit a 30-years low in 2007-08.

Then came the global financial crisis, and the deficit surged to 6%, and since then the government has not been able to bring it below 3%.

Budget 2017 is expected to be a feel-good one. The income tax slab restructuring and increasing the exemption limit are on the cards. Social sector spending, such as NREGA, food subsidy, insurance schemes, and welfare pensions, is expected to go up.

The ICRA report said, “Meaningful recovery in private sector investments is unlikely in the next one to two quarters. Therefore, we expect the government to significantly expand its budgetary allocation.”