At around 7.5 per cent of gross domestic product (GDP), the revenue-to-expenditure gap in India is one of the highest among major emerging markets.
According to estimates by International Monetary Fund (IMF), total government expenditure was equivalent to around 27.1 per cent of GDP while total government revenue was around 19.6 per cent of GDP in the last calendar year.
The revenue-to-expenditure gap in India is similar to that in Brazil but much higher compared to China, Russia and Indonesia.
In China, government expenditure exceeded revenues by 6.1 per cent of GDP last year while it was a negative 1 per cent of GDP in Russia and 1.9 per cent in Indonesia (see adjoining chart).
Data on general government operations include state governments but exclude local governments (such as municipal corporations), state and central PSUs as well as social security funds.
In Asia, only Pakistan has a bigger gap between government revenues and expenditure. In calendar year 2019, Pakistan’s government expenditure exceeded revenue by 8.8 per cent of country’s GDP. In comparison, the gap was only 4.8 per cent in Bangladesh, 5.7 per cent in Sri Lanka and 4.4 per cent in Vietnam.
A relatively higher fiscal gap in India has translated into a greater level of public debt-to-GDP ratio in the country. “At around 69 per cent of GDP for the year FY20, India’s public debt is relatively large in comparison with other major emerging market economies,” said the IMF in its recent consultation paper on India.
The fund partly blamed the recent rise in public debt to the corporate income taxes. “In the absence of offsetting measures, it (tax cut) would contribute to pushing general government debt to a 10-year high of 69 per cent of GDP by the end of FY20,” the IMF added.
Higher public debt has translated into a high interest burden which stood at 4.9 per cent of GDP during FY19, well above emerging market peers.
The ratio is around 3 per cent for the other four BRICS countries – Brazil, Russia, China and South Africa – while it’s around 1.5 per cent in case of ASEAN countries, according to the IMF.
Piyush Garg, chief investment officer at ICICI Securities said the government will become increasingly constrained in its ability to keep borrowing as the debt-to-GDP keeps rising.
“India’s overall debt-to-GDP ratio is an outlier among emerging markets,” he said.
He pointed out that nominal GDP growth has also been slowing which further limits the amount by which the deficit can be increased. The risks of higher debt can affect India in various ways, including through downward pressure on currency.
Garg believes that the next fiscal year is likely to see some signs of improvement. This may also help government finances.
CARE Ratings chief economist Madan Sabnavis said, “For the last few years, we have been in an economic slowdown which forced the government to spend more money to push up growth. This also meant that it hasn’t been able to go by earlier targets on fiscal deficit. Lower growth has also led to lower tax collections which further exacerbates the situation.” He feels that things may remain at similar levels for the time being.
“It’s going to take some time before the private sector is able to pick up. Until such time, the government will be forced to run these kind of deficits,” he said.
The fact that India’s debt is largely in its own domestic currency, unlike some emerging markets, may mean that the country is relatively more insulated. This is despite the issues associated with higher debt numbers, according to Sabnavis.
Higher deficit numbers aren’t restricted to India. It is expected to rise in emerging and advanced countries alike, noted a January 2020 Economy Watch report by consultancy firm EY.
The US fiscal-deficit-to-GDP-ratio is expected to rise to seven per cent in 2019 and remain elevated.
Rising fiscal-deficit-to-GDP is also true for the UK. China and South Africa may also see a similar trend. India has had its own challenges on revenues, too, according to a forward to the note authored by D.K. Srivastava, EY India’s chief policy advisor.
“The central government’s tax base has also been eroded by a significantly lower growth in imports and global trade challenges,” it said.
IMF, however, said that a high interest-payment-to-GDP ratio restricts a government’s ability to raise public spending on social and infrastructure projects.