Home / Politics / Policy /  Government abandons revenue deficit targeting

New Delhi: The Union budget has proposed to stop setting targets on revenue deficit reduction from next year through an amendment in the Fiscal Responsibility and Budget Management (FRBM) framework. Experts say this may sway government’s expenditure more towards consumption spending away from more productive capital expenditure.

In his budget speech, finance minister Arun Jaitley said he is accepting the key recommendations of the N.K. Singh committee on fiscal discipline to bring down debt-to-GDP ratio to 40% by 2024-25. “Government has also accepted the recommendation to use fiscal deficit target as the key operational parameter. Necessary amendment proposals are included in the Finance Bill," Jaitley said.

The revenue deficit broadly measures the extent of borrowings used for revenue expenditure, while fiscal deficit measures the overall borrowing to finance both revenue account deficit as well as capital account deficit.

For a few years now, the centre has also been reporting a narrower version of revenue deficit called “effective revenue deficit", which measures the revenue deficit minus grants to states for creation of capital assets. Government has proposed to abandon tracking both these targets.

While the government managed to keep its fiscal deficit in 2017-18 at the previous year’s level of 3.5% of GDP after fiscal slippage of 30 basis points, its revenue deficit during the period has slipped to 2.6% of GDP from 1.9% of GDP during the same period, at a time it has compressed capital expenditure by Rs36,000 crore from its budget estimate.

“There is no great qualitative difference in government’s capital and revenue expenditure. A lot of capital expenditure is done outside the budget by public sector units. The distinction is more artificial than real," economic affairs secretary Subhash Chandra Garg said in an interview.

In the medium term fiscal policy statement released as part of the budget documents, the finance ministry said in a country with numerous development deficits, an undue focus on revenue deficits may be detrimental to equitable development. “Human capital and its development by focusing on schools and hospitals and also maintenance of assets, which are in nature of revenue expenditure, are as important to improve productivity as buildings and roads," it added.

In the N.K. Singh Committee, there was extensive discussion on whether to target revenue deficit or not and except chief economic adviser Arvind Subramanian, who added a decent note to all the major recommendations of the report, all the other four members of the committee including Reserve Bank of India governor Urjit Patel agreed that revenue deficit needed to be brought down gradually. It recommended reduction of revenue deficit by 25 basis points every year to bring it down to 0.8% by 2023-24 without eliminating it completely.

“The logic of this is that borrowing for expenditures that are to be incurred year after year is neither desirable nor sustainable; these should be tax-financed. This is the basis of the commonly known as the golden rule (of fiscal policy)," the committee said.

D.K. Srivastava, chief policy adviser at EY India said since physical infrastructure is deficient in India, it would be useful first to fix that deficiency before doing away with targeting revenue deficit. “Social infrastructure like health and education should be financed through increase in tax-GDP ratio, while fiscal deficit can be used to finance physical capital formation while keeping revenue deficit in balance," he added.

N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, said the philosophy behind the FRBM Act was to force government from switching from consumption to capital expenditure as the latter has a higher multiplier effect on GDP growth. “But if government is doing away with revenue deficit targeting and going ahead only with fiscal deficit targeting, it will have serious implication not only on GDP growth but also on achieving public debt target," he added.

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