Fiscal deficit fixing, go faster, stronger

The Centre is running up the fiscal deficit quicker than in the previous year. Yet, the unavoidable overshoot is likely to be absorbed by tax buoyancy and the conservative budget assumption of nominal GDP. On current indications, a full-year fiscal slippage of ₹1 lakh crore will not breach the 6.4% target significantly given an expected nominal GDP overshoot of around ₹20 lakh crore. The fiscal slide is principally on account of the fertiliser subsidy, bumped up revenue expenditure, a spike in capital expenditure and a dip in non-tax revenue. The central government has some headroom with food subsidy and farmer income support, which are running well behind budgeted allocations. There is also scope to pull back on revenue expenditure in the later part of the year. The markets may be too volatile to push the pedal on disinvestment. Spectrum auctions have been encouraging, but the payments are deferred.

A slowing economy will require the government to persist with its capital expenditure commitments till the private investment cycle recovers. This will coincide with keeping some buffer against elevated energy prices. These considerations will determine the extent of fiscal correction attempted in the upcoming budget. The glide path to the target 4.5% fiscal deficit by 2025-26 will be calibrated by the pace of economic recovery in an adverse global scenario. Front-loading the 2-percentage-point reduction could jeopardise hard-earned gains in protecting the vulnerable against exogenous supply shocks.
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Tax revenue buoyancy controls the speed of restoration of the fiscal balance. Some of this year’s performance has to do with the underestimated nominal GDP. The assumptions were rendered unrealistic in part by the disruption in the energy markets. With greater clarity on the evolving global trade scenario, the Centre’s budget-making exercise should be able to focus on increasing tax revenue. Plugging exemptions and an improved tax administration have improved revenue buoyancy. The Centre and states should maintain the momentum.