Briefly discusses the critical fiscal position of the Govt. of India finances

1. GOI's Finances in Critical Condition
Shantanu Basu
The finances of GOI are in complete shambles. As on Jan. 31, 2020, the fiscal deficit is
estimated at Rs. 9.85 lakh crore or about a third of the total Union budget's expenditure
proposals. That translates to 128.50% of the revised estimate of the deficit for this FY. In
effect, a third of expenditure proposals will never see the light of the day before Mar. 31,
2020. Traditionally, maximum tax revenue is realised in the last quarter of a FY. However,
this year with disastrous three quarters and now the CV menace, the actual fiscal deficit could
well cross into ~45-50% (of all expenditure) bracket. Already, the fiscal deficit is
camouflaged to 3.4-3.5% (of GDP) in this FY but reflecting over a third of all govt. budgeted
expenses.
If one were to add approx. Rs. 3 lakh off-budget borrowing by FCI to the deficit, the
percentage of revenue shortfall will jump by another third, say to ~45%. FM has clubbed all
ongoing welfare schematic expenses from various budget heads in arriving at her so-called
CoVid-19 relief package, there are elements like DBIT to the registered indigent workers,
payment of EPF contributions, free LPG cylinders, hike in MNREGS wage rate, etc., that
MoF would have to fulfil, say by a conservative 5% of all expenses, i.e. about Rs. 1.45 lakh
crore. MNREGS at pre-existing rates are pending in several states for 3-6 months; the rate
hike would be s tall order to implement after paying arrears of wages.
In effect, GOI may be potentially short of fiscal resources up to a colossal 50% of its
budgeted expenditure in the current FY. That would have to be filled by market borrowing
that would only add to the estimated Rs. 6.25 lakh crore interest liability of GOI in 2019-20;
interest alone accounts for approx. 22% of GOI's expenditure. To fill the gaping hole of ~45-
50%, fresh large borrowings would have to be made, that, in turn, would eat a still larger
proportion of the GOI's budget for 2020-21 and onward. Add to these staggered supplier bills
from last year and the current year (carried over every year), additional NDRF & SDRF
contribution, the deficit could top ~50% of all GOI expenditure.
I have adopted the hit on GOI spending ability rather than the ambiguous GDP expression,
for the former mirrors the GOI's repaying capacity and determines the interest spread (high
risk = higher repayment risk) on borrowings. Nor is any divestment going to take place in a
poorly performing equity market. The only glimmer of hope is the grotesquely inflated AGR
dues of India's tottering telecom sector.
In fine, GOI has no choice but to at least double the FRBM to at least 7-8% of estimated GDP
to start with (against WB CM's appeal for a 5% cap). That would mean severe pressure on
credit and investment (owing to rising interest rates) and attendant inflation. GOI's current
debt : GDP ratio is about 70% compared to the UK's 86% with Japan at 236%, and the US at
about 105%. With decline in GDP numbers forecast by Moody's today at 2.5% for the current
year, the debt : GDP figure will rise appreciably beyond 70%. Since Covid-19 is entering its
third stage, GOI would have to dip into its 2020-21 budget for far more relief without much
accretion in revenues given the lock down and way below par performance of India's
economy in the last year or so.
The financial condition of GOI is indeed most worrisome. What is even more irksome is its
ability to provide far greater fiscal resources for CoVid-19 relief since much of reserves held
in CPSU shares, RBI & SEBI reserves, CPSU dividends would also cause diminution of
India's asset security required for borrowing (already this has been diminished very

2. substantially in the last 4-5 years). Overseas borrowing is very dicey with the steady decline
of the INR in the last six months. One of the last reserves left is India's foreign exchange
reserves of nearly a half trillion USD and the good fortune of low oil prices at least till the
CoVid-19 gloom lifts. Restarting India's stalled economy that has just entered recession
(much like global markets that reduces demand for Indian exports) is no mean task and well
take several years. We can only hope GOI is able to captain India's economic ship amid
unending waves.(729 words)
The author is a senior policy analyst and commentator