INDIA’S FISCAL DEFICIT REACHES 83% IN THE FIRST 3 MONTHS OF FY-2020

What is a fiscal deficit?

Fiscal deficit is the difference between the total revenue and total expenditure of the government. For example, if the expenditure of the government is 20cr but the revenue is 15cr, then the fiscal deficit here is -5cr.

As we know the target fiscal deficit of the government is 5% of the GDP. If we take the GDP of India as 200 lakh crores then the fiscal deficit should be 10 lakh crores. This means that the government wants to spend 10 lakh crores more than it is earning.

How does the government meet the fiscal deficit?

The primary method of meeting the fiscal deficit is through borrowing. This can be done through various means like, borrowing from the RBI, floating bills and papers in the market etc. Thus,

the total fiscal deficit of a year= the total borrowings of the year.

So now let us come back to the current news. The government has already spent 83% of the total money i.e. 8.3 lakh crores; that was kept aside as fiscal deficit for FY20, in the first 3 months of the year itself, i.e. April, May and June.

India’s estimated fiscal budget for the year 2020-21, in the Union budget was supposed to be 3.5% of the GDP i.e. 7.96 lakh crores. The gap between the revenue and expenditure for the same period, April to June, is 61.4%. This was brought about by the unprecedented costs due to the coronavirus.

Since 1997, this is the first time when there has been such a huge jump in the fiscal deficit expenditure, in the first quarter.

What are the reasons for this?

In the aftermath of the pandemic the government’s main source of earning, that’s the tax revenues, have collapsed. The net tax revenue (money remaining with the centre after sharing it with the state governments) for the 3 months is Rs.1.35 trillion which is a drop of 46.4% from the same time last year. The total earnings for the 3 months stood at Rs. 1.54 trillion which is just 6.8% of what the government hopes to earn this year.

What is the government’s total expenditure?

The expenditure for the 3 months stood at Rs. 8.16 trillion or 26.8% of the money that it expected to spend in a year. The main expenditures are salaries, pensions, and also interest payments on the government debts.

Why has the revenue declined?

1. Collapse of tax revenue due to the pandemic.

2. The central GST is down by 52.9% to Rs. 55,047 crores.

3. Private consumption has fallen a great deal.

4. Corporate revenues have fallen leading to slowdown in payment of corporate income tax by 23.3%

5. Personal income tax collected by the government has fallen by 35.9% as a contraction in personal income has led to the fall in private consumption as mentioned in point 3.

Solution?

Disinvestment of government stakes in public sector enterprises. The target was to earn Rs. 2.1 trillion in the whole year but nothing has been earned in these 3 months.

So, to conclude, the circumstances are such that the amount kept as fiscal deficit, will have to increase drastically through borrowings of every nature, by the government.