Fiscal deficit understated, not less than 4.66% in FY19, says Subhash Garg

Former finance secretary Subhash Chandra Garg has said fiscal developments in last two financial years show the government has not adhered to the two statutory commitments it had made in 2003-04 -- fiscal deficit reduction to 3 per cent by FY21 and the Centre's debt and liabilities to less than 40 per cent of GDP by FY25.  Garg had resigned last year after he was suddenly transferred from the finance ministry to power as its secretary.

In a blogpost titled 'Some Policy Issues Connected to Fiscal Deficit and Debt Management', published on January 15, Garg said India revised its fiscal deficit from 3.2 per cent to 3.5 per cent in FY18 (which was also the actual) and announced its headline fiscal deficit at 3.3% for FY19. In another blogpost title 'Comprehensive Note on Fiscal Deficit and Debt in India', published on January 14, he had said the actual fiscal deficit in FY19 and FY18 was not less than 4.66 per cent and 4.39 per cent of the GDP against government's claim of 3.4 per cent and 3.3 per cent, respectively.

In his latest blog, Garg said FY19 turned out to be fiscally more difficult than the government had planned. Asserting how the fiscal deficit was understated, Garg wrote the Centre had revised headline fiscal deficit to 3.4 per cent for FY19 and the fiscal deficit for FY20 was brought down to 3.3 per cent in the 2019 Budget.

He, however, said the headline fiscal deficit for the current financial year will not be less than 3.5 per cent and actual fiscal deficit will be "much higher", considering the revenue and expenditure performance.

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"Given that the revenues are unlikely to see any sharp uptick in next FY 2020-21 and flexibility to compress expenditure is almost not available, it is almost impossible to keep even the headline fiscal deficit to 3 per cent for FY21," he added.

Likewise, the debt and liabilities trajectory is moving quite in reverse direction than the one which was possibly expected while determining the deadline of 2024-25 for achieving the goal of 40 per cent debt to GDP ratio, he said.

Maintaining that the government would need to amend the FRBM Act, again, to push both the fiscal deficit goal of 3 per cent to, say, 2025-26, and debt and liabilities goal of 40 per cent to, say, 2030-31.

Garg said it would be more convincing if the fiscal deficit goal was defined to include all budgetary and off-budgetary liabilities, which currently are around 4.5 per cent of GDP. "A five-year roadmap for brining real fiscal deficit down from 4.5 per cent of GDP to 3 per cent is quite reasonable and rigorous," he added.

He said many people would be "cynical" about the Centre's commitment for fiscal consolidation following its failure to achieve the goal even after 15-16 years of its original adoption.

"However, if the government were to disclose and incorporate all its fiscal expenditures into the fiscal deficit and state the fiscal road map (.25 to .3 per cent reduction consistently every year) in the budget, the fiscal correction and consolidation would sound more credible," he said.

Edited by Manoj Sharma

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