Can the government substantially cut expenditure to meet fiscal deficit target?

Key Highlights

• SBI said target of 3.2% fiscal deficit not difficult for current fiscal.
• Shortfall in expenditure has been estimated to be Rs 1.1 lakh crore by SBI.
• Fiscal deficit will be no more impacted by 10 basis points in upward direction, SBI said.

The debate around India’s fiscal deficit target continued as State Bank of India on Monday ridiculed reports of revenue slippage by the government by stating they were ‘grossly misconstrued.’

“There are doomsday predictions currently that Government is going to have a big revenue slippage in FY18 which may impact the headline fiscal deficit numbers. However, such projections flunk the test of logical reasoning and are grossly misconstrued,” SBI said.

Fiscal deficit is a term for government spending which exceeds government revenues. A higher fiscal deficit places an additional financial burden on the economy.

However SBI seems to think that the government needs to reduce expenditure by a mere Rs 1 lakh crore to meet fiscal deficit target of 3.2% in FY18.

“There may still be a shortfall of Rs 1.1 lakh crore in the revenue receipts. To manage the fiscal deficit, Government however needs to cut expenditure substantially,” SBI said.

It further added, “We estimate that Government may cut around Rs 70,000 crore from capital expenditure and Rs 38,000 crore from revenue expenditure compared to budget estimate of FY18.”

India’s fiscal deficit as a percentage of gross domestic product (GDP) was reportedly second to last before Brazil in FY17, a report by Live Mint said.

The combined central and state fiscal deficit for FY17 was 6.5% of GDP. “Analysts estimate that the response to domestic agricultural distress through farm loan waivers could add 25-50 basis points to this number in the current fiscal year,” the report added.

Banking regulator, Reserve Bank of India (RBI) also spoke up against the number of loan waivers introduced by the governments of Uttar Pradesh, Punjab and Maharashtra. Loan waivers are expected to cost these states at least Rs 36,000 crore Rs 10,000 crore and Rs 25,000 crore respectively, as per government estimates. 

An Edelweiss report suggested loan waivers may cost the government anything between Rs 1.3 lakh crore and Rs 2.3 lakh crore this fiscal.

A report by Bank of America Merrill  Lynch estimated loan waivers to cost the government up to Rs 2.6 lakh crore.

"In the absence of coordinated and sustained efforts to put in place elements of a virtuous cycle of uplift of farmers' income, loan waivers have periodically emerged as a quick fix to ease their distress,” RBI’s Urjit Patel said in September.

SBI’s argument on fiscal deficit target of 3.2% in FY18 ‘seems not difficult,’ was also based on estimates that its disinvestment target has been met. In the current year so far, government has raised Rs 19,759 crore through minority stake sale in CPSEs and 'strategic disinvestment,' the report said.

“We believe that Government will able to meet the disinvestment target of Rs 72,500 crore as Rs 60,000 crore has already been achieved,” SBI said.

“Interestingly, the possibility of a lower than estimated 11.8% nominal growth is unlikely to translate to a higher fiscal deficit as nominal growth numbers for FY17 has already been revised upwards. We estimate even if the nominal growth declines to 10% from 11.8%, fiscal deficit will be no more impacted by 10 basis points in upward direction,” SBI added.

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• Who gets impacted by these farm loan waivers? Banks, NBFCs or MFIs