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February 28, 2019

Indian Economy: Fisking the fiscal math

The past couple of years have seen the central government veer off their fiscal targets. Thiswas mainly due to transitory disruptions from demonetisation, glitches in implementationof the goods and services tax, and more recently, the income support scheme for farmers.An analysis of the central government’s finances over the past 15 years - the periodspanning the rule of the United Progressive Alliance (UPA) I, II, and the present NationalDemocratic Alliance (NDA) governments – reveals the following:


  • The fiscal deficit of the central government has come down from over 6% of GDP in thepost-crisis period of fiscal 2010 to around 3.4% in fiscal 2019. However, after a phaseof consolidation, the government’s finances are once again under stress
  • The medium-term objective of the fiscal policy has been to bring down the deficit to3% of GDP on a sustained basis, as prescribed by the Fiscal Responsibility and BudgetManagement (FRBM) Act. However, this target has been met only once since 1991 – in2008, on the back of strong growth and changes in tax rates leading to healthy taxcollections. Meeting this target has been an exception rather than the norm
  • Historically, the gap between actual fiscal deficit and the budget target has been quitewide and increases with the time horizon of the target. What is encouraging is thatdespite a high error rate, the gap has been narrowing over time in the base year as wellas first- and second-year ahead rolling forecasts
  • Final budgets do not differ much from interims in terms of overall fiscal targets andbroad expenditure and revenue trends as the wiggle room remains more or less thesame due to commitments under the FRBM Act. After it took over in May 2014, the NDAgovernment had retained the fiscal targets set in the interim budget of the UPA IIgovernment. The wiggle room for fiscal 2020 does not exist as fiscal deficit has beentargeted 30 basis points higher than originally envisaged under FRBM

Part of the recent slippage is due to transitory factors that will correct over a period, but agood part is also due to factors that could persist. There is a need to check populistmeasures such as farm loan waivers and accelerate attempts to mobilise revenue toregain fiscal health.