The government's fiscal deficit for April-June 2020 touched ₹6.62 trillion, already reaching 83.2% of the annual budget due to a collapse in tax revenues from the economic slowdown caused by COVID-19. Total government expenditures have remained relatively stable while earnings decreased significantly. To finance the deficit, the government is considering disinvesting public sector stakes and may increase borrowing levels. However, the Reserve Bank of India is unlikely to directly purchase government bonds in the first half of the year due to adequate investor demand. The Fiscal Responsibility and Budget Management Act allows for increased slippage in deficit targets during economic crises.

1. Ballooning fiscal deficit is a grave issue for the govt
The fiscal deficit for April to June touched ₹6.62 trillion. It’s already at 83.2% of
the budgeted fiscaldeficit forthe currentfinancialyear. Thisis the highestdeficit
during the first three months as a proportion of the budgeted annual deficit, in
the past 24 years. Mint takes a look.
Why has the fiscal deficit inflated?
Fiscal deficit is the difference between what a government earns and what it
spends. In theaftermath of the pandemic, the government’s earnings, primarily
tax revenues, have collapsed. The net tax revenue, or what remains with the
central governmentafter sharing its earnings with the state governments, from
April to June stood at ₹1.35 trillion, a drop of 46.4% in comparison to the same
period lastyear. After taking into accountthe other earnings of thegovernment,
the total earnings of the government from April to June stood at ₹1.54 trillion.
This is just 6.8% of what the government hopes to earn during the year.
What about the govt’s total expenditure?
A largeportion of the governmentexpenditure in the form of salaries, pensions,
and interest payments on existing government debt, is fixed. The government
expenditure from April to June stood at ₹8.16 trillion, or around 26.8% of the
money that it expects to spend during the year. The government has
earned ₹1.54 trillion during the period, implying a fiscal deficit of ₹6.62 trillion.
Against a budgeted annual fiscal deficit of ₹7.97 trillion, the fiscal deficit during
the first three months of FY21 is already at 83.2% of the budgeted level. This is
a major problem for the central government.
Why have the government’s tax revenues collapsed?
The slowdown in economic activity, as a result of the covid-induced lockdown
led to tax revenuecollapsing.The centralgoodsand servicestax aredown 52.9%
to ₹55,047 crore. This implies a huge contraction in household consumption.
Corporaterevenues fell, leading to a slowdown in paymentof corporateincome
tax by 23.3% to ₹54,212 crore.

2. What about personal income tax?
Personalincometax collected by thegovernmenthasfallen by35.9%to ₹62,123
crore. A contraction in consumption has led to personal incomes falling.
Ultimately, one man’s spending is another man’s income. Also, corporates are
trying to deal with a contraction in revenues by firing employees, cutting their
salaries or putting them on furlough. As such, falling incomes have led to lower
personal income tax collection for the government. A contraction in tax
collection implies a contraction in economic activity.
What can the govt do in such a situation?
There are no easy solutions. The disinvestment of the government’s stakes in
public sector enterprises is one approach that could be adopted. Between April
and June, next to nothing has been earned from divestment, against the
budgeted ₹2.1trillion. Thegovernmentneeds to hurrybecausethe stockmarket
has recovered from its March low and has rallied again. There is no way of
knowing which way the markets will turn in the months to come.
Government borrowings
An acute resource crunch and pressure to roll out more fiscal stimulus have
prompted the government to keep alive plans to raise its gross market
borrowingagain in FY21,havingalready hiked it by54%from the budgeted level
to Rs 12 lakh crore.
The aboverevisionin borrowingsandthe selling of government-dated securities
have been necessitated on account of the COVID pandemic. The note released
by the governmentadded that it hastaken this decision in consultation with RBI,
after reviewing the cash position and requirements of the central government.
The governmentborrows to fund its spending on public services and benefits. It
is kind of a loan taken by the government and falls under capital receipts in the
Budget document. As the revenue falls short in financing the government’s
spending programme, the government announces an annual borrowing
programme in the Budget to meet the expenditure and fiscal deficit targets.

3. Importantly, thegovernment hasn’t junked the idea of deficit monetisation but
that would be the last resort, given the already-elevated level of inflation and
other associated risks, the source said. Its decision on deficit monetisation will
determine the quantum of its additional borrowing in the second half.
India Ratings chief economist DK Pant didn’t expect any major shift in the
government’s full-year marketborrowing plan this year. Given theuncertainties
around the revenue flow as well as expenditure requirement, the government
may alter the borrowing plan meaningfully only later this fiscal, when it has a
more realistic assessment of the state of the economy. “Also, the extent of
market borrowing hinges on whether the government opts for deficit
monetization,” he added.
Icra principal economist Aditi Nayar said the Centre’s fiscal deficit could widen
to at least Rs 14 lakh crore (7.4% of the shrunk GDP) in FY21 from the budgeted
Rs 8 lakh crore. The government had budgeted to contain fiscal deficit at 3.5%
of GDP in FY21 but its fiscal math, obviously, has gone haywire due to the
pandemic.
Whether RBI will monetise govt deficit?
The Reserve Bank of India is unlikely to monetise the Centre’s fiscal deficit at
least in the first half of this fiscal year, sources in the know said.
Fornow,there isno need forthe centralbankto intervenedirectly or indirectly,”
a governmentofficial said. A look at the full auction results for G-secs on April8
and 17 show that issuances were oversubscribed. Sources say this indicated
healthy demand of G-secs from investors.
Monetising the deficit is when the RBI directly purchases G-secs on the primary
market to help with the Centre’s expenditure. In turn, the RBI prints more
money to finance this debt. The practice of monetising deficit was in vogue till
1997, when it was discontinued by then RBI governor C Rangarajan.
But for fighting the Covid-19 pandemic and its effects, Rangarajan and others,
including former finance minister P Chidambaram and former chief economic

4. advisor Arvind Subramanian, have said that monetisation of all or part of
government deficit needs to be done.
States, whichhavebeen askingforadditional resources,havealsosuggestedthis
route. Kerala Finance Minister Thomas Isaac has suggested that not only the
Centre, the states should also be allowed to sell bonds directly to the RBI.
No need to amend FRBM Act as it provides headroom for big fiscal slippage
beyond 0.5% of GDP
For the Centreto borrowmorethan budgeted, it willalso mean that the existing
2020-21 fiscaldeficittarget of 3.5 per cent of GDP willno longer hold. The Fiscal
Responsibility and Budget Management (FRBM) Act allows for a 0.5 per cent
fiscal slippage under escape clause and deficit monetization under strict
conditions.
The 'escape clause' allows the government to breach its fiscal deficit target by
0.5percentagepointsat times of severestressin theeconomy,including periods
of structural change, or when growth falls sharply, acts of war, calamities of
national proportion, collapse of agriculture severely affecting farm output and
income, with unanticipated fiscal implications.
Finance Minister Nirmala Sitharaman had already utilised this 0.5 per cent
‘escape clause’ to revive the slowing economy before the pandemic hit India’s
economy.
However, FRBM Act goes much beyond the 0.5 percent escape clause, to
accommodate big fiscal slippages. The original FRBM Act of 2003 states the
union finance minister has to inform the Parliament on fiscal deviations caused
by unforeseen circumstances and whether the deviations are substantial.
Economic disruption caused by the COVID-19 pandemic is likely to fit the
"unforeseen circumstances" under the FRBM Act and can be used by the
government to explain larger fiscal slippages.
The FY20 March end fiscal deficit now stands at 4.59 percent against the 3.8
percent revised target, a breach of 0.7 percent or a Rs 1.69 lakh crore gap, as
per the Comptroller General of Accounts (CGA) data released on Friday.

5. Questions:
1. Why has the fiscal deficit inflated?
2. Which are the options available to government to finance fiscal deficit?
3. What is monetisation of fiscal deficit and its impact?
4. Why it is unlikely for RBI to monetize the Centre’s fiscal deficit at least in
the first half of this fiscal year?
5. What is a fiscal stimulus?
6. What is an escape clause?
7. Why there is no need to amend FRBM Act in the current scenario?
8. Identify the sources of revenue receipt and capital receipt from the
article.