A very unusual trend in the fiscal deficit
With government expenditure this fiscal year frontloaded, the scope for government expenditure supporting demand in the current quarter is low
The overshooting of the full-year fiscal deficit target by the end of November 2017 has set the cat among the pigeons, drawing blood in the bond markets. But how unusual is reaching 112% of the budgeted fiscal deficit for the full fiscal year by November-end?
As the chart shows, it’s very unusual. The chart has the percentage of the full year’s budgeted figures achieved till end-November. Note that, as a percentage of the full year’s fiscal deficit, this year’s figure is the highest since 2008-09, the year of the financial crisis, when the government spent hand over fist in an attempt to prop up the economy. Indeed, in that year, the fiscal deficit ended up at 6% of gross domestic product against the budgeted 2.5%. The current situation bears no comparison with 2008-09 and a miss of the deficit target, if any, at the end of the year will be a modest one. But the markets are perturbed.
Is the deficit because tax revenues have been badly affected? Not really—as the chart shows, by end-November 2017 the central government had already achieved 57% of its net tax revenue target, which isn’t bad at all considering the historical trend. But it’s lower than the proportion of tax collected by November last year, no doubt because the excise hikes on petrol and diesel contributed handsomely to government coffers in 2016-17.
This is not to minimize the concerns about lower revenues from the goods and services tax this year—a Kotak Institutional Equities report says that as of now, indirect tax revenues for the current fiscal year are running well short of the budgeted target.
What sticks out like a sore thumb from the chart is the much lower proportion of non-tax revenues garnered this year. This is no doubt the result of the Reserve Bank of India’s (RBI’s) stingy dividend this year, in stark contrast to the rosy predictions of a windfall dividend voiced in some quarters as a result of demonetisation. Instead, the extra interest the central bank had to pay out on securities issued to mop up excess liquidity due to demonetisation led to large interest costs for RBI, leading in turn to lower dividends.
What has also happened is that government expenditure by November has been much higher, as a proportion of the budgeted spending. Very likely, this is because of the earlier date of the Union budget, which allowed the ministries to start spending immediately as the fiscal year started, unlike in previous years.
What of the months ahead? The Kotak report says, “Any shortfall in government revenues will affect its ability to spend on infrastructure and the rural economy, which may dash the Street’s high expectations about government spending driving India’s economic revival.” In any case, with government expenditure this fiscal year front-loaded, the scope for government expenditure supporting demand in the current quarter is low.