Eco Basics: Understanding Fiscal Deficit

 

Today's article focuses on Fiscal Deficit.

What types of receipts are non-debt creating?

Revenue Receipts, Recoveries of Loans, and Other Receipts are all non-debt creating. This means that the government does not have to borrow to generate these sources of income.

Now, look at the accompanying table: Fiscal Deficit is numbered 22, Revenue Receipts is 1, Recoveries of Loans is 5 and Other Receipts is numbered 6.

Hence,

(22) Fiscal Deficit = (16) Total Expenditure – [(1) Revenue receipts + (5) Recoveries of loans + (6) Other Receipts]

Revenue Receipts would include both tax and non-tax revenue of the Government of India (GoI).

What is tax revenue? 

This refers to revenue that the GoI gets by way of collecting taxes, like Personal Income Tax, Corporate Tax (charged on incomes of companies), Central Sales Tax and Service Tax.

What is Non-tax revenue? 

This would include Stamp Duty and Dividends earned from Public Sector Units (PSUs). Dividend is the return on capital invested by the government in PSUs.

Sometimes the Government of India receives money that it would have lent to some country/organization in the past. When such money is received, it is recorded under the ‘Recoveries of Loans’ head.

When does Fiscal Deficit arise?

Fiscal Deficit arises when the government has expenditure higher than the revenue it generates. To bridge this expenditure-revenue deficit, the government resorts to borrowing. This borrowing is called Fiscal Deficit.

In short, fiscal Deficit is the total borrowing of the Government of India to fund the allocations and expenditures listed in the Union Budget.

In the table above, the Budget Estimate for Fiscal Deficit for 2020-21 (total borrowing) was projected at Rs7,96,337 crore. But the economic ravage brought about by the Covid pandemic destroyed major sources of tax and non-tax revenues. 

The shortfall in Gross Tax Revenue (includes GST, Income Tax, Corporation Tax and other taxes) was Rs5,22,740 crore. The projected figure for Gross Tax Revenue in 2020-21 was Rs24,23,020 crore, but the Central Government could collect only Rs19,00,280 crore. 

So, the Revised Estimates for 2020–21 show a Fiscal Deficit of Rs18,48,655 crore. In other words, what this figure means is that the Government of India is borrowing this huge amount of money in 2020-21! Yes, you got it right: a total borrowing of mind-numbing Rs18.48 lakh crore in one year!

Fiscal Deficit is usually expressed in terms of percentage of the country’s Gross Domestic Product (GDP).

Now, go to the bottom of the table. It is mentioned that India’s GDP in 2020-21 will be Rs194,81,975 crore (Rs194.8 lakh crore).

Taking India’s GDP to be Rs194,81,975 crore in 2020-21, the Fiscal Deficit of Rs18,48,655 crore works out to 9.5% of GDP.

So, to say that we are living way beyond our means would be an understatement. However, given the Covid pandemic-induced shutdown there was little elbow room for the Central Government to raise revenue and hence, it had to resort to very heavy borrowings to fund its welfare schemes. like providing free food grains and direct cash transfer to millions of heavily impacted vulnerable sections of the society. 

In the next post, I will write on how a high Fiscal Deficit could spell doom for the economic growth of the country. 

Indian Economy's Vital Stats Infographic

 

Here's a snapshot of the Indian Economy's Vital Statistics.

$543 Billion!

According to India’s Ministry of Finance’s report on external debt, India's external debt was at around $543 billion as at end-March 2019. In terms of external debt ranking, India ranks 24th in the world.

External debt of India is the money owed by India to foreign creditors. In simple words, it is the money we have borrowed which we have to pay back (along with the interest on it).

World’s Most Indebted Nations
With a debt of $20,263 billion, the United States is the world’s most indebted country, i.e., it has the highest external debt. In fact, the U.S.’ external debt is a tad lower than the combined external debt of the three next ranked countries: the United Kingdom (second rank at $8,491 billion), France ($6,470 billion), and Germany ($5,800 billion).

Types of Debts
As you know, based on maturity (when it becomes due for payment), there are two kinds of debts: long-term and short-term.

A loan with a maturity period of more than one year is termed long-term debt.

A loan with a maturity period of less than one year, i.e., this debt would become due for repayment in the next twelve months, is called short-term debt.

Short-term debt includes both the principal and the interest on such loans. In other words, short term external debt includes short term debt by original maturity as well as long term debt (that has become due for maturity).

A government (just about any authority) prefers long-term debt for a fundamental reason: the longer the maturity period of the debt the lower the pressure on repayment.

In this context, it is pertinent to cite the breakdown of India’s external debt by maturity: about 80 per cent of the total external debt is long-term (i.e., about $434 bn of $543 bn). It is a no-brainer to say that the lower short-term debt works in the country’s favour.

Components of External Debt
There are several components of India’s external debt. However, for the common person to understand something as complex as external debt, the following are the main components of India’s external debt:

• Multilateral credit – borrowed by the Government of India from institutions like the International Monetary Fund and the World Bank;

• Bilateral credit – borrowed by the Government of India from other countries (like Japan);

• External commercial borrowings (ECBs) – these are the borrowings of companies like Bharti Airtel from abroad;

• Deposits of Non-Resident Indians (NRIs). NRI deposits are treated as liabilities as they have to be repaid to the depositors, and

• Foreign Institutional Investment (FII) – investment by foreign fund houses (like mutual funds) in India’s stock markets and government securities.

Sources of the external debt of $543 bn
The Reserve Bank of India has a lowdown on the debt mix of the Government of India.  

 

 As you deduce from the source mix, just about 19 per cent of the total external debt is owed by the Government of India. This government debt is also called ‘Sovereign’ debt. The remaining part of the external debt is non-government debt. 

Vulnerability of the Indian economy
India is not vulnerable to any major or minor problem arising on the external debt front. The World Bank’s SDDS says that there is no vulnerability of the Indian economy to external shocks on the debt front. India’s foreign exchange reserves (of around $447 billion in November 2019) to external debt is around 82 per cent is within manageable limits. 

That's all folks!

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