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Fiscal Deficit Slippage

India is expected to miss its Fiscal Deficit target for FY 2018-19. For the first eight months of the FY18-19, India’s Fiscal Deficit reached 115% of the budgeted target. The target for FY18-19 was set at Rs 6.24 lakh crores, however, this target was breached and is currently at Rs 7.17 lakh crore. This is due to a shortfall in revenues and lower than targeted disinvestment proceeds.

Revenue of the Government

Up to November 2018, the Government of India received Rs 8,96,583 Crore. It is the sum of:

  • Tax Revenue – Rs7,31,669 Crore
  • Non-Tax Revenue – Rs 1,38,637 Crore
  • Non-Debt Capital Receipts – Rs 26,277 Crore
    • Recovery of Loans – Rs 10,467 Crore
    • Disinvestment of PSUs – Rs 15,810 Crore

The revenue receipts were at 50.4% the budgeted estimates, lower than 53.1% during the same period last year. This is mainly due to lower tax collection. Direct Tax collection has been robust, while indirect tax might miss the target.

Expenses of the Government

Total Expenditure incurred by the Government of India was Rs 16,13,208 Crore. Comprising:

  • Revenue Account – Rs 14,21,778 Crore
  • Capital Account – Rs 1,91,430 Crore
  • Interest Payments – Rs 3,48,233 Crore
  • Major Subsidies under Revenue Account – Rs 2,19,046 Crore

The government had budgeted to cut the fiscal deficit to 3.3% of GDP in 2018-19, from 3.53% in the previous financial year. However, by November deficit was 115% of the Budget Estimate. The government is under pressure from the Revenue side, particularly from the indirect and non-tax revenue. The decision to keep the Fiscal Deficit at 3.3% of GDP is under pressure due to the muted response from GST and welfare benefit schemes for farmers ahead of 2019 elections.

A higher fiscal deficit means the government expenditure is high and this will push demand and generate more money and ultimately increasing inflation. To reduce the deficit the government might start introducing more taxes or raise the existing ones. A high fiscal deficit may also leave little room for interest rate cuts hence slowing the economy. With high government borrowing, there is hardly any room left for the private sector to borrow from the market stalling the growth plans. This, in turn, will affect the stock market as high selling pressure in the market will bring down the market. This will affect all the equity investments and hence the mutual funds.

But any announcement of OMO purchases by the central bank in January and persistent decline in crude prices should prevent G-sec yields from rising in the immediate term and will provide short-term relief to the economy.

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