India’s fiscal deficit for the ongoing financial year will the highest since at least liberalisation in 1991.
The country’s fiscal deficit settled at 9.5% in 2020-21 and will be targeted at 6.8% in 2021-22, Finance Minister Nirmala Sitharaman announced in her Budget 2021 speech.
The central government had pegged the fiscal deficit at 3.5% for FY21 in the last budget before the onset of the Covid-19 crisis. The pandemic inflicted twin pressures on the government’s balance sheet—a contraction in nominal GDP, which brought down tax revenues, and a need for greater spending to support the economy.
As a result, the fiscal deficit likely saw a sharp overshoot to 9.5%. For FY22, the 6.8% target is the highest since 1994.
Budget 2021: Related Coverage
For FY21, a bulk of the deterioration in fiscal deficit is countercyclical, led by the need for government spending, a note from QuantEco Research said ahead of the budget. This is different from the global financial crisis period, when the deterioration in fiscal deficit was led by a fall in tax revenue and divestments and rise in revenue expenditure, the note said.
A Fiscal Reset
The Covid-19 crisis has also meant another reset to the medium term fiscal road map. 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 finance minister stated in her budget speech.
The Finance Commission, however, suggested a 4% target by FY26, according to budget documents.
We have assessed that, given the compulsions on the revenue account of the Union Government, including of lending support to the budgets of sub-national governments, they may have to follow an elevated path of fiscal deficit with a terminal year 2025-26 target of 4% of the GDP.Report of the 15th Finance Commission
The FRBM Act had set the fiscal deficit target at 3% of the GDP by FY21, according to an amendment to the act in 2018. However, additional spending during the pandemic has delayed fiscal consolidation path.
The time-table for defining and achieving debt sustainability may be examined by a high-powered, inter-governmental Group involving the union and state governments, the commission’s report said. This group can craft the new FRBM framework and oversee its implementation, it said.
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