Home >News >India >Ballooning fiscal deficit is a grave issue for the govt
The fiscal deficit for April to June touched  ₹6.62 trillion
The fiscal deficit for April to June touched 6.62 trillion

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 fiscal deficit for the current financial year. This is the highest deficit during the first three months as a proportion of the budgeted annual deficit, in the past 24 years. Mint takes a look.

The fiscal deficit for April to June touched 6.62 trillion. It’s already at 83.2% of the budgeted fiscal deficit for the current financial year. This is the highest deficit 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 the aftermath of the pandemic, the government’s earnings, primarily tax revenues, have collapsed. The net tax revenue, or what remains with the central government after 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 last year. After taking into account the other earnings of the government, 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 large portion of the government expenditure 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.

Record high
View Full Image
Record high

Why have the government’s tax revenues collapsed?

The slowdown in economic activity, as a result of the covid-induced lockdown led to tax revenue collapsing. The central goods and services tax is down 52.9% to 55,047 crore. This implies a huge contraction in household consumption. Corporate revenues fell, leading to a slowdown in payment of corporate income tax by 23.3% to 54,212 crore.

What about personal income tax?

Personal income tax collected by the government has fallen by 35.9% 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 2.1 trillion. The government needs to hurry because the stock market 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.

Vivek Kaul is the author of Bad Money.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.

Close
x
×
My Reads Redeem a Gift Card Logout