Fiscal deficit target to be met for 2016-17
The Finance Minister of India, Arun Jaitley, informed that the government will be able to meet its fiscal deficit target of 3.5% of GDP (gross domestic product) at current market prices for the financial year 2016-17.
In India (INDY), a financial year begins in April and ends in March of the subsequent year.
This achievement comes in the face of a rise in government expenditure for the second successive year. According to figures reported in the Union Budget for 2017-18, the revised estimates of government expenditure for 2016-17 stand at INR 20.1 trillion (or $300.7 billion). This is higher by a sizable $5.4 billion over the budget estimates.
The reason that the government still expects to meet its fiscal deficit target this year is because of the rise in gross tax revenues. The government informed that according to revised estimates for 2016-17, gross tax revenues are projected to surge by INR 753 billion (or $11.25 billion) over budget estimates for the year.
Fiscal target for 2017-18 shifted
The FRBM (Fiscal Responsibility and Budget Management) Act requires the government to adhere to fiscal discipline, reflected by a decline in fiscal deficit. In its original form, the Act was expected to do away with revenue deficit and reduce fiscal deficit to 3% of GDP by financial year 2007-08.
However, due to the Great Recession which took hold of the global economy, the target could not be met and kept getting deferred.
In the Union Budget for 2017-18, the Indian government has once again deferred the 3% target to 2018-19. In the previous Budget, the government had aimed to meet the target in 2017-18 itself, but is now aiming for 3.2% fiscal deficit for the year. It said that in face of private investment not picking up, increased public expenditure was required, thus pushing up the fiscal deficit target for 2017-18.
Impact on the country’s ratings
The most direct impact of either adhering to or missing fiscal deficit target is on the credit rating of the country. This, in turn, makes a country investible to large funds, especially conservative pension funds. As Turkey has recently found out, a downgrade from investment-grade into junk territory forcibly leads funds to withdraw from a market given their investment mandates and requirements.
India’s relatively low credit rating has been a matter of debate for some time. Let’s look at this aspect more closely in the next article.