In a move that seemed to surprise economists and financial markets alike, Finance Minister Nirmala Sitharaman, in her Interim Budget, pegged the fiscal deficit for 2024-25 at 5.1% of the estimated GDP (gross domestic product).
The Narendra Modi government has run an average fiscal deficit of 6.5% in the five years of its second term (2019-2024), the highest by any government in the post-1991 reforms era.
The government could achieve a fiscal deficit reduction of only 0.37% of GDP in 2022-23 and 0.53% in 2023-24 RE (revised estimate). The promised reduction of 0.75% in 2024-25 is a lot steeper.
Does the announcement indicate a serious intent for fiscal consolidation or is it a gambit to generate a feel-good factor?
Government Jettisoned Fiscal Deficit Discipline in 2021
In the first term (2014-2019), the Modi government vowed to adhere to the virtues of fiscal deficit discipline. As soon as it took over, the it committed to bringing the fiscal deficit down to 3% of GDP. Arun Jaitley announced a fiscal glide path. In 2018-19, the government got the Fiscal Responsibility and Budget Management (FRBM) Act amended to a target of 3% from 2020-21.
The government tried very hard to attain this goal but succeeded only partially. It even resorted to keeping some liabilities off-budget (hoping that this was a temporary move). The government could bring the fiscal deficit down from 4.8% in 2013-14 to 3.5% of GDP to about 4.0% if you include off-budget liabilities.
The government started feeling increasingly constrained by the fiscal deficit limit in 2019. Using the opportunity provided by COVID, it decided to jettison the strait jacket of fiscal deficit.
The government’s intentions were clearly bared on 1 February when Nirmala Sitharaman, presenting the revised estimates for 2020-21, pulled out all the stops. Without beating an eyelid, she said: “The fiscal deficit in RE 2020-21 is pegged at 9.5% of GDP.”
The government was to redeem the statutory pledge of bringing down the fiscal deficit to 3% of GDP in 2020-21. Instead, it delivered a fiscal deficit three times that. It was absolutely unprecedented in India’s three-decade history since 1990-91, when it was measured and presented for the first time.
A Discretionary Weak Target of 4.5% by 2025-26
Displaying utter disregard for the law of the land, the Finance Minister abandoned the fiscal deficit stipulations of the FRBM Act in her budget speech 2021-22.
In its place, she casually laid out a new discretionary fiscal consolidation path: “We plan to continue with our path of fiscal consolidation, and intend to reach a fiscal deficit level below 4.5% of GDP by 2025-2026 with a fairly steady decline over the period.”
The government did not present any medium-term fiscal projections for the year 2022-23 and 2023-24 in the Medium Term Fiscal Policy Cum Fiscal Policy Strategy Document, placed alongside the 2021-22 Budget.
Instead, the Finance Minister said: “The Government will amend the FRBM Act. Hence, no fiscal projections for the years 2022-23 and 2023-24 have been presented along with this Statement.”
The government has not cared to get the FRBM Act amended. Nor has the government presented the required medium-term fiscal projections in any of the last three budgets. The logic of the 4.5% fiscal deficit target has never been explained.
It is, at best, a loose discretionary fiscal consolidation goal.
Humungous Fiscal Deficits in the Second Term
The table has the details of the fiscal deficits of the Modi government in its second term.
Fiscal deficit and GDP (2019-2024).
(Photo: Author)
The 2020-21 fiscal deficit understandably was an outlier as it brought all, though only its own, off-budget borrowings (food subsidy arrears to the FCI paid through NSSF loans and fully serviced bonds started in 2016-17) on the budget.
From 2021-22, there were no off-budget or any other extraordinary expenditures. Yet, the government maintained very high fiscal deficits in the last three years (2021-2024). The average fiscal deficit in these three years has been Rs 16.86 trillion. This is huge, that is, 6.29% of GDP.
For the five years of Modi 2.0, the fiscal deficits averaged 6.5% of average GDP! No government in the post-economic reform era (1991-92 onwards) has run this kind of massive fiscal deficit.
Ironically, the Narendra Modi government holds the distinction of running the least fiscal deficit in its first term (3.63%) and the worst fiscal deficit in its second term (6.49%).
Small Fiscal Deficit Consolidation in the Last Two Years
The actual fiscal deficit in 2021-22 turned out to be 6.75% of GDP. Let us take it as the base.
From 2021-22 to 2025-26, for the four years, the annual fiscal deficit reduction is 2.25% in four years or 0.56% a year to get to 4.50%.
The actuals are available for 2022-23. The fiscal deficit to GDP ratio for the year is 6.38% means the achievement of only a 0.37% reduction.
For 2023-24, we can only consider the revised fiscal deficit. At Rs 17,34,773 crore, the estimated fiscal deficit is 5.85% of the GDP of Rs 296.58 trillion. The government would achieve fiscal consolidation of 0.53% only this year.
For both the years (2022-23 and 2023-24), the fiscal deficit reduction has been much smaller than the required 0.56% per year.
Is 5.1% Fiscal Deficit for 2024-25 Credible?
Visibly self-pleased, Nirmala Sitharaman claimed credit for continuing on the path of fiscal consolidation: “We continue on the path of fiscal consolidation, as announced in my Budget Speech for 2021-22, to reduce the fiscal deficit below 4.5 % by 2025-26. The fiscal deficit in 2024-25 is estimated to be 5.1% of GDP, adhering to that path.”
The fiscal deficit goal of 5.1% of the estimated GDP in 2024-25 will require a reduction of 0.75% in that year.
This is much higher than the fiscal consolidation (0.37% and 0.53%) achieved in the last two years. In two years, the government could achieve fiscal consolidation of about 0.9% of GDP. It is promising a 0.75% reduction in one year.
The promise does not appear to be credible given the track record.
Feel Good Gambit?
There are two large constituencies of voters that the government needed to reach out to before the Lok Sabha elections — the poor and the middle class.
The poor have been seemingly won over by free foodgrains, cash hand-outs through schemes like the PM KISAN, and promises of more housing and other ease of life facilities like tap water, subsidised LPG gas, etc. This economic package is topped with the blessings of Lord Ram.
It was the middle class that had to be reached out to in the Interim Budget. Instead of more tax cuts, the government probably thought that the route to their hearts and minds was through the stock markets with about 13 crore Indians holding stocks in their dematerialised accounts.
The provision of increased capital expenditure would boost corporate profits which will, in turn, boost the share prices. The lower fiscal deficit will improve returns on fixed-income assets besides enabling the middle class to invest more in stocks.
The 5.1% fiscal deficit seems to have succeeded in sending the right feel-good message to the markets, the analysts, and, most importantly, to the growing Indian middle class.
(The author is a former Economic Affairs Secretary and Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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