However, what stands out is that after stabilizing around the FRBM target of 3.5% between FY16 and FY19, the latest fiscal year has seen a virtual overshooting of the fiscal deficit. One can argue that the surge in fiscal deficit in FY21 was triggered by the pandemic and that is correct. However, there is no gainsaying the fact that the fiscal deficit of 9.3% is absolutely unsustainable and we will look at the distinct risks of such a level of fiscal deficit later. That is because fiscal deficit means government has to borrow and add to its debt burden.
How did India manage to restrict fiscal deficit to 9.3% of GDP in FY21?
According to the data put out by the Controller General of Accounts (CGA), India's Fiscal deficit for FY21 came in at an absolute figure of Rs18.21 trillion. That fiscal deficit measured on the GDP of Rs196 trillion in FY21 comes to 9.3%. While the number is lower than 9.5% of GDP as estimated in the Budget, one needs to remember that these are revised numbers. Let us get back a little into the history of these revisions.
In FY21, the government had to spend heavily on a fiscal stimulus and its revenue sources also faltered. This resulted in the government resorting to borrowing more than Rs12 trillion from the market. Thus, the original fiscal deficit target of 3.5% of GDP was eventually scaled up to 9.5% in Feb-21. Effectively, while the final number of 9.3% looks better than the revised estimate, it must be remembered that the revised estimate was a whopping 600 bps beyond the original estimate.
What triggered this marginal improvement in the fiscal deficit as percentage of GDP in FY21. There are two factors with the numerator and the denominator supporting this fall in fiscal deficit ratio. Firstly, the collections of direct taxes and GST as well as excise on petrol and diesel were much better than expected in the second half of FY21. That slightly reduced the fiscal deficit in absolute terms. Secondly, the rebound in the third and fourth quarters also helped GDP in absolute terms to close better than expected. That also helped the fiscal deficit ratio to trend lower.
Five risks to the fiscal deficit story in FY22
While the fiscal deficit for FY21 looks optically better than estimated, there are some real fiscal risks to be wary of. Here are 5 such concerns.
• The CGA has estimated revenue deficit at 7.42% of GDP, which is a bit like borrowing for your morning breakfast. Normally, rating agencies frown when the revenue deficit / fiscal deficit crosses 50%. For FY21, this ratio is at 80%.
• The government has set a target of Rs12 trillion for FY22 but has now decided to borrow an additional Rs158,000cr for state GST dues of previous year. If the current year dues are added, the fiscal deficit could already end up at 8.5% instead of 6.8%.
• The numbers we are talking about is just central fiscal deficit or CFD. State deficits have gone up sharply in the last one year and a consolidated picture may look a lot more intimidating for macro watchers.
• With oil at $70/bbl and petrol at Rs.100/litre, the government has very limited leeway left to boost revenues by taxing petrol and diesel.
• The last risk is comparative growth. China is already growing at 18% and the US at 6%. That kind of recovery is yet not visible in India. If the growth gap widens and fiscal deficit remains high, rating agencies may be inclined to look at India’s rating once again.
Optically, it is good news that fiscal deficit for FY21 was 20 bps lower as percentage of GDP. However, the bigger risks to the fiscal deficit story may only emerge in FY22.