Has the fiscal deficit reached 83% of FY21 target in Q1 itself? Not really

The figures we should consider to calculate fiscal deficit should be the enhanced borrowing level announced in May, rather than the one announced in February

Has the Union government’s fiscal deficit in the April-June quarter of 2020 indeed exceeded over 83 per cent of the Budget Estimate (BE) for the full financial year of 2020-21?

No, this is not really what has happened.

The figures put out by the Controller General of Accounts on Friday have compared the deficit figures for April-June 2020 with the BE figures for the full year of 2020-21 given in the Budget presented last February. This does place the first quarter’s deficit at as high a level as 83 per cent of the full year’s deficit target. And this is alarming.

But these are unusual times and Budget making has also become quite unusual. For instance, about three months after the presentation of the February Budget, the government announced its plan to borrow Rs 4.1 trillion more during the year to help it meet the economic challenges of Covid-19. This effectively raised the government’s total borrowing or the fiscal deficit to about Rs 12 trillion.

Thus to get a real sense of how much of the budgeted deficit for the full year has already been used up, the denominator cannot be the borrowing level announced in February. It should ideally be the enhanced borrowing level announced in May.

If you used the denominator of Rs 12 trillion as the total fiscal deficit projected in 2020-21, a figure of Rs 6.62 trillion is about 55 per cent of the total deficit for the full year. This is still large and a cause for concern. But this is not as large as 83 per cent.

The current unusual times also call for a review of  the figures for the past year with which the current year’s numbers are being compared. In the first quarter of 2019-20, the fiscal deficit was Rs 4.32 trillion. This was 61 per cent of Rs 7.04 trillion, the BE fiscal deficit for the entire year of 2019-20. But the actual fiscal deficit for 2019-20 turned out to be much higher at Rs 9.36 trillion. So, at the end of the first quarter of the last financial year, the actual fiscal deficit was only 46 per cent of the full year’s deficit level.

So, there is deterioration in the Union government’s fiscal deficit level. But a more appropriate way of describing it would be to say that the fiscal deficit in the first quarter of 2020-21 was 55 per cent of the full year’s deficit target, compared with 46 per cent in the previous year. In other words, the government will have a little more time in containing the deterioration in its fiscal deficit by trying to boost revenues or cut expenditure, than it would have if it had already reached 83 per cent of the full year’s deficit level at the end of the first quarter.  

There are five other important takeaways from the numbers released for government finances during the April-June quarter of 2020.

 

One, the government has given a big boost to its capital expenditure in the first quarter of the year – by raising it by as much as 40 per cent to Rs 88,273 crore. Remember that the 2020-21 Budget had projected an increase in capital expenditure for the full year by only 22 per cent to Rs 4.12 trillion. Thanks to the need for ramping up investments in roads and other infrastructure sectors in the wake of the pandemic, the government has thus used up 21 per cent of the full year’s Budget in the first three months. Do not expect, therefore, any bunching up of capital expenditure in the remaining months of the year.

Two, the government’s revenue expenditure too has increased in the first quarter of 2020-21, but by a lower margin of 10.5 per cent to Rs 7.28 trillion. Here, the government has clearly reined in expenditure as the full year’s growth in revenue expenditure was projected at about 12 per cent. That this has been achieved in spite of higher outlays on agriculture, animal husbandry, fisheries, health, family welfare and rural development would suggest that the government has cut its expenditure on other items including the dearness allowance for its employees and other non-obligatory spending.

What has also helped the government in reining in its revenue expenditure is lower oil prices. This along with other economy measures has led to a 48 per cent decline in its subsidies expenditure on food, fertilisers and oil to Rs 79,000 crore in the April-June 2020 period, compared to Rs 1.52 trillion in the same period of 2019. This is a significant amount of saving, which helped the government in containing its revenue expenditure growth.

Three, the overall expenditure of the government, therefore, has seen a 13 per cent rise in the first quarter of 2020-21 to Rs 8.16 trillion. This increase is broadly in line with what the Budget had projected in February – a growth rate of 13.25 per cent for the full year. Thus, the government has kept its expenditure in shape within the overall projections it had made in February. And at the same time, it had re-prioritised its expenditure by increasing capital outlays and reining in its revenue expenditure.

Four, as expected, the real challenge in the first quarter of 2020-21 seems to have come from the revenue side. The government’s overall net revenue (a figure that is material for calculating its fiscal deficit and arrived at after transferring the resources, which must be shared with the states) has fallen by 47 per cent, compared to the same period of 2019-20. Remember that the Budget had projected a 20 per cent increase in its net revenue. The bulk of this shortfall is on account of net tax revenue, which has fallen by over 46 per cent. The government’s non-tax revenue also has seen a decline, but not as precipitous as in tax revenue. The pace of disinvestment process in the coming months would hold key to whether the non-tax revenue target is met or contributes to the overall revenue shortfall.

On the whole, this will be an onerous task in the coming months. If the shortfall of 47 per cent in net revenue is not made good or at least reduced in the coming months, the government’s leeway in providing more stimulus through higher spending will become more limited.

Finally, one area that may cause concern is the extent to which the government’s dependence on external sources has increased in financing its fiscal deficit. External financing in the first quarter of 2020-21 has shot up more than four times to Rs 29,500 crore! This is already close to three times more than what was borrowed from external sources in the whole of 2019-20. This trend would remain under close watch in the coming months.