Taking cue from FRBM Act, FM tinkers with fiscal math

With lower revenue and higher committed expenditure, Finance Minister Nirmala Sitharaman took the fiscal expansion path not just for current fiscal, but also for the next fiscal. This is despite over 37 per cent reduction in food subisidy and nearly 11 per cent reduction in fertiliser subsidy.

Fiscal deficit is the difference between income and expenditure of the government. The Minister estimated deficit for the current fiscal to be 3.8 per cent as against 3.3 per cent announced in the Budget last year. Similarly, for the next financial year, fiscal deficit will be 3.5 per cent as against 3 per cent estimated earlier.

Making use of Section 4 (2) of the FRBM (Fiscal Responsibility and Budget Management) Act which provides for a trigger mechanism for a deviation from the estimated fiscal deficit on account of structural reforms in the economy with unanticipated fiscal implications, she said she has taken a deviation of 0.5 per cent, consistent with Section 4(3) of FRBM Act both for RE (Revised Estimate) 2019-20 and BE (Budget Estimate) 2020-21.

The Minister assured that the government will go for fiscal consolidation in the following years. Accordingly, the projection for fiscal deficit in 2021-22 has been kept at 3.3 per cent, while for 2022-23 it is pegged at 3.1 per cent. “This fiscal path commits us to the path of fiscal consolidation without compromising the needs of investment out of public funds,” she said.

The increase in deficit estimate is mainly on account of the revenue as the government has lowered its expenditure on many of the heads. For example, food subsidy in BE 2019-20 was over ₹1.84 lakh crore, which has been lowered to ₹1.08 lakh crore in the RE. For BE 2020-21, food subsidy is pegged at ₹1.15 lakh crore. Similarly, for fertiliser subsidy, BE was nearly ₹80,000 crore, which has been kept at almost similar level in RE, but lowered to little over ₹71,000 crore in BE for 2020-21.

Experts’ views

Aditi Nayar, Principal Economist at ICRA, said the Central tax devolution to the States has undergone a substantial correction in the RE for FY2020 to ₹6.6 lakh crore from the budgeted level of ₹8.1 lakh crore, on account of both the adjustment for FY2019 (₹0.6 lakh crore), with the balance on account of the downward revision in the government’s tax forecast for FY2020.

If the gross Central tax collections of the Union Government do not evolve in line with the 12 per cent growth assumed in the Budget relative to the FY2020 RE, then the expansion in Central tax devolution to ₹7.8 lakh crore in FY2021 BE would come under a cloud. “Moreover, 10 of the 28 States have seen a reduction in their inter se share in central tax devolution as per the interim report of the 15th Finance Commission for FY2021, and would need to carefully assess their revenue situation,” she said.

Abheek Barua, Chief Economist with HDFC Bank, felt that the Budget provides credible numbers in terms of the fiscal math, recognising the revenue shortfall faced this year. It uses the half a per cent leeway that the FRBM Act provides for both this and the next year which is a welcome step.

“The Budget commits to increasing the expenditure by 13 per cent in 2020-21 with increased allocations for education, health and certain schemes in the agricultural sector. That said, this expenditure increase, coupled with the income tax cuts, does not seem to suggest a large fiscal stimulus that the current slowdown perhaps warranted. Of course, the fiscal space to do that was limited to begin with,” he said.