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Government revises fiscal deficit target in interim budget: Here's what experts have to say

Government revises fiscal deficit target in interim budget: Here's what experts have to say

Government revises fiscal deficit target in interim budget: Here's what experts have to say
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By Sapna Das   | Timsy Jaipuria  Feb 2, 2019 4:47:59 PM IST (Published)

Interim finance minister Piyush Goyal's interim Budget speech included a number of key announcements, one of which was revising the fiscal deficit target to 3.4 percent from the previous 3.3 percent.

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The fiscal deficit is the difference between the total revenue and expenditure by the government.
With this being the last Budget of the Modi government ahead of the Lok Sabha elections, increase in spending was expected, especially allocation of funds for farmers as they go through crisis. On the other hand, the government has seen a combination of revenue shortfall, with GST still being in the transition period.
K V Subramaniam, chief economic advisor and Subhash Chandra Garg, secretary, economic affairs, discuss the government's decision to revise the fiscal deficit target.
Watch the video here:
Edited Excerpts:
A broad question, you have been asked enough on the new fiscal roadmap for FY20. 0.3 percent of the GDP is the deviation; it is not a small deviation. We understand probably it is because of Rs 75,000 crore that you are giving as the farm package. However, there are other elements also if you look at the fiscal math. The government also agreed to release Rs 23,000 crore as direct taxes to a large section of people. Add that number so you are looking somewhere around Rs 1 lakh crore already. How necessary was this decision at this point in time, what signal are you trying to send, how do we anticipate the markets to read this?
Garg: You are basically asking for the next year, FY19-20. So FY19-20 we have provided the fund for the farm package completely. We have also taken note of the concessions which have been offered and therefore on the tax side the growth rate assumed for the next year is only about 14.8 percent.
Garg: It is I think reasonably conservative. We have seen taxes grow at about 20 percent on direct taxes side for the last two years. One the indirect taxes now with GST settling down, etc... we have assumed still lower growth rate in all giving it about 14.8 percent. So, 14.8 percent growth rate assumption to my mind is very realistic for the next year.
If you have a nominal growth rate of about 11.5-12 percent, then getting 14.5 percent or 15 percent rate of growth on taxes should be quite reasonable. With the economy picking up now, and the rate of growth exceeding 7-7.5 percent and therefore that estimate to my mind is very realistic.
On the expenditure side also we have announced every expenditure which we needed to provide including the farm package. Therefore, fiscal math for the next year is very reasonable and realistic in my judgment. We are very conscious that we do not have to borrow very much from the market.
But that is quite marked up, Rs 7 lakh crore worth of market borrowing.
Garg: The Rs 7 lakh crore includes basically two additional elements. Our borrowing for funding the fiscal deficit is much lower at about Rs 4.4 lakh crore or something. We have a large repayment programme next year, I think it is about Rs 2.4 lakh crore. We have also provided Rs 50,000 crore for the buyback. So about Rs 3 lakh crore is for the repayment of buyback which is not the deficit finance.
So, net market borrowing for the fiscal deficit programme which is the net withdrawal from the economy, when we repay there is no net withdrawal. So, that also is being kept very low and this is thanks to the fact that there is good inflow in the small savings side and therefore we have not even grown the net market borrowing to the extent which normally should have been.
We mentioned about the GDP numbers, I mean the fact that the base is expanding now, very recently the revised numbers have come in, I suppose we have not been able to factor those numbers in into this Budget.
Garg: If you factor that, then the fiscal deficit is actually 3.1 percent for next year.
Can you explain that?
Garg: It is very simple. The FY17-18 nominal GDP reported on Thursday by the Central Statistics Office (CSO) is Rs 170 lakh crore. If we grow it by 11.5 percent for two years, the GDP for FY19-20 would be something close to Rs 225 lakh crore as against GDP of Rs 210 lakh crore which we assumed. So if you take the fiscal deficit as it is and take Rs 225 lakh crore as the GDP, the fiscal deficit to GDP ratio would come out to 3.1 percent.
Keeping the numbers aside, how do you see the economy in future in the coming years, especially when we have seen very poor jobs data. There are media reports that the jobs data was buried and we saw that jobs are not growing post demonetisation and GST. Also, when it comes to the agrarian distress, do you think this income guarantee scheme or income support scheme is actually going to give a boost to the farm sector because effectively if we see, it is just Rs 500 per month that is what a farmer is going to get and that too the poorest of the poor. Rs 500 a month, does it mean enough for the farmers and for the urban class how would you address the jobs discourse which is happening right now, that this is a jobless growth that we are seeing which is not good for the future of the economy.
Subramaniam: If you look at the way the economy has done over the last five years, I think we have to take into account a few noteworthy facts. Number one, if you look at the GDP growth rate, the average GDP growth rate has been 7.3 percent and I am only using the old numbers. If you use the new numbers, it may be much higher.
Any projection that you can share with us?
Subramaniam: We have done it, we have to go and look at the details of what has changed, but if we use the new numbers, it will become 7.6 percent. However, let us stay with the 7.3 percent. That 7.3 percent growth rate is the highest for any government since liberalisation.
When you put that together with the fact that inflation has been historically low, inflation December 2018 was 2.19 percent, and if you project the inflation that was there five years back, double-digit 10 percent inflation, so if you project that, what you are looking at is those essential commodities today, many of those would have been 30-35 percent higher. So, you have a high growth rate with historically low inflation which means that in real terms the incomes have increased significantly.
If you also look at the fiscal prudence and secretary already talked about, the glide path is being pursued. If we take some of the newer numbers on GDP, the numbers will start looking even better. However, what is critical is that fiscal prudence has been followed and it is again important to take in mind here that the fiscal prudence has been followed despite greater devolvement following the 14th finance commission and the 7th pay commission recommendations as well.
There have been significant benefits that have gone to the middle class; I just mentioned about the inflation, the fact that what you have to pay is about 35-40 percent lower. If you look at the real rates of interest that middle class earns, when you had double-digit inflation, you were looking at -2 and -3 percent real rate of interest. In contrast with actually taking the rates of interest now and about a 4 percent inflation, you are looking at about 3 percent real rate of interest.
Together with what you have looked at today which is the benefit to the middle class, I think there is a significant benefit that has gone to the middle class which puts disposable income in the hands of those that are important. Keep in mind that we are in a global environment where there are headwinds that come due to globalisation. As a result, it is extremely important for us to actually create robust growth in the domestic economy and that is being done by putting disposable income in the hands of the domestic consumers.
To respond to your agrarian distress, I think what is important to keep in mind here is that this targeted Rs 6,000 is above and beyond other schemes that are already there, for instance, the minimum support price (MSP) at 1.5 times cost which puts a profit margin of 50 percent of the cost for 23 crops. That is something which is very important. Together with that you also have other schemes that have not been touched, this is in addition to that.
As an economist I would say that this is important because you have a situation where the population is growing at less than 1 percent, your agricultural productivity is actually growing at more than 3 percent. As a result, you will have more surplus which will bring down prices. Therefore, it is quite important for this sector to actually be taken care of.
You have to take into account also the fact that eNAM and other technological solutions which are being done because the government has identified that it is the marketing that is important on the agriculture side, and many of these will fix that.
You mentioned about the food inflation number and the entire environment being very benign, the next RBI MPC is around the corner, just this week. Do you expect a rate cut or not?
Garg: Let me begin with what you asked earlier and you have started by saying that the unemployment number, jobless number which you have seen, I do not know that data has not been official whether those are trustworthy or not, what you have seen. Let us wait for that data to come. What I would like you to note is that the unemployment in India is not very high.
Official unemployment captured by any data, 4-5 percent unemployment rate is really not a very high rate. What we have is low income, low paying jobs. That is what is the bigger problem and that is where on the farm side despite the efforts to provide subsidies, to cut their cost, despite the effort to provide support in the form of MSP at 50 percent, 50 percent income if you can provide to the farmers, that income would have taken care. However, overproduction, prices remaining low, food inflation remaining low had created a situation where farmers needed support.
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