Budget 2020: FY21 fiscal deficit likely to be around 3.5% of GDP

As reported earlier, fiscal deficit for the current year could be between 3.5 per cent and 3.8 per cent of GDP
Union Finance Minister Nirmala Sitharaman could target a fiscal deficit of around 3.5 per cent of gross domestic product (GDP) for 2020-21 (FY21) in the upcoming Union Budget, Business Standard has learnt.

According to the existing medium-term fiscal framework, the Centre is targeting a fiscal deficit of 3 per cent of GDP for the coming year. Going by the projected nominal GDP for FY21 of Rs 227 trillion in the recently released National Infrastructure Pipeline (NIP) report, a slippage from that to 3.5 per cent could lead to an extra spending room of around Rs 1.13 trillion.

For 2019-20 (FY20), Sitharaman had budgeted a fiscal deficit target of 3.3 per cent of GDP. It is now clear that the target will not be met, with slowdown in real and nominal GDP, the gross tax revenue shortfall expected to be much higher than Rs 2 trillion, and doubts being cast on the Centre meeting its Rs 1-trillion divestment target, even as the finance ministry has mandated the central departments to rationalise expenditure by around Rs 2 trillion.

As reported earlier, fiscal deficit for the current year could be between 3.5 per cent and 3.8 per cent of GDP. Compared to the current medium-term targets, a fiscal deficit forecast of around 3.5 per cent will be an expansion. However, compared to what the Centre actually achieves this fiscal year, it could be a fiscal contraction.  In the pre-Budget meetings, economists and experts have been advising Sitharaman and Prime Minister Narendra Modi to leave aside fiscal concerns and embark on an expanded expenditure programme to revive the economy.

Business Standard has learnt that policymakers have debated on whether to go on a spending spree or stick to a fiscal consolidation road map. While a number of bureaucrats have advised on leaving aside budgetary concerns, the political leadership is of the view that fiscal discipline has to be maintained. “The political leadership’s view hasn’t changed from the first term of this government. There has to be some discipline, even if the advice from others has been to go for substantial slippage,” said a senior official aware of these deliberations.

A second official said that a fiscal slippage next year does not mean the government will risk deviating heavily from the Fiscal Responsibility and Budget Management Act. 

“The aim is to always stay on a fiscal glidepath, with a 3 per cent medium-term target,” a second official said. This, of course, means that like every time since the FRBM Act came into force in 2003, the 3-per cent medium-target will be further pushed down the road and could be delayed by two years or so. The Centre is expected to have heavy expenditure commitments next year.

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