The Delusion of Budget

The Annual Budget is of prime importance for the whole country, be it common public, businessman or investors. The Budget for FY20 is not any different. Considering the economic slowdown, owing to an array of factors (we guess you all are aware by now), and apparently, the world’s fastest growing economy reporting its lowest GDP growth numbers in FY19 in 5 years, a revival in consumption and investment demand is of paramount importance. As such, everyone is anxious about the measures that would be taken to combat the current conundrum. Fiscal stimulus via government spending, across various sectors would be keenly watched.

Fiscal deficit for FY19 was pegged at 3.4 per cent of GDP. However, the number doesn’t show you the true picture about India’s current fiscal stance.
To all the peeps out there, let us tell you that this 3.4 per cent figure is the budgeted number. There are other off-budget financing avenues by which the Government raises funds to meet its revenue and capital spending and which are not portrayed in the Annual Budget.
If one takes into account these expenses into the fiscal deficit calculation, the figure doesn’t look propitious at all. The Adjusted Fiscal Deficit for FY19 is hovering around 4.7 per cent of GDP. Moreover, the reliance on Extra Budgetary resources (EBR) has been moving northwards over the years and the government has been increasingly using it for funding its capital expenditures; bulk of rural and infrastructure spending announced in 2018 Budget was financed through EBR!!!
Some of the off-budget financing sources, the Government has resorted to in recent years are National Small Savings Fund (NSSF) loans and government-serviced bonds issued by public sector entities. Till FY09, it relied on funding via issuance of special bonds like oil bonds, fertilizer bonds and Food Corporation of India (FCI) bonds. The problem of raising funds through NSSF is that the government will have to maintain higher interest rate on small savings to attract deposits from households. This will keep the cost of capital inflated and impede monetary transmission process, thereby making policy rate cuts
Taking the EBR figures would definitely take the current fiscal number, go for a toss. A more transparent framework would help maintain the credibility of the data and reflect a true picture of the economy’s health. For the Government, it has no option but to increase government spending and instil policy reforms to bolster the country from the ongoing headwinds like consumption slowdown, liquidity crunch, trade war. Nevertheless, this will come at a cost of denting the fiscal numbers, which would further accentuate after taking EBR into the scheme of things.

It will be interesting to see what’s there in the briefcase of first whole time women Finance Minister of the country.

(Source: Livemint, ET, Moneycontrol)

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