Borrowing for 2018-19
The government has projected a fiscal deficit of 3.3% of GDP for the fiscal year 2018-19 from a fiscal deficit of 3.5% of GDP for the fiscal year 2017-18 (Revised Estimate). The absolute level of fiscal deficit is Rs 6242billion against Rs 5948 billion, a growth of 4.94%. The higher absolute level of fiscal deficit despite a lower fiscal deficit to GDP ratio is due to growth in nominal GDP, which is pegged at 11.5% by the government.
The fiscal deficit is normally financed largely by market borrowings through an issue of dated government securities. Market borrowings financed 92%, 87%, 83%, 80% and 80.7% of the fiscal deficit in FY 2013, FY 2014, FY 2015, FY 2016 and FY 2017, Budgeted market borrowing for FY 2018-19 is Rs 4071 billion. Correspondingly, gross borrowing is budgeted to increase slightly by Rs 55 billion to Rs 6055 billion. The government has Budgeted bond buyback for Rs 719 billion in fiscal 2018-19 up by 26%.
The government has shown a net market borrowing of Rs 4071 billion to finance the fiscal deficit of Rs 6242 billion, which is 65.2% of the fiscal deficit. The market borrowing to finance the deficit is a sharp drop from previous year’s revised level.
How can the government show such a sharp drop in net borrowings?
The increase in inflows into the NSSF (National Small Savings Fund) has changed the borrowing dynamics. The government has also discontinued investments of NSSF receipts into state government securities and all investments are made in central government securities. NSSF inflows are budgeted at Rs 1001 billion for fiscal 2017-18, which were revised to Rs 1026 billion for fiscal 2017-18, For fiscal 2018-19 government has budgeted for Rs 750 billion. The government has also budgeted for higher inflows through other receipts at Rs 846 billion against Rs 343 billion seen last year.
Government is pegging the gross borrowing at Rs 6055 billion. After carrying out bond buybacks for Rs 719 billion and switches for Rs 280 billion. Bond redemptions for 2018-19 are at Rs 1080 billion.
Deducting gross borrowing of Rs 6055 and redemptions of Rs 1080 billion, net borrowing works out to Rs 4975 billion which is higher than government estimates of Rs 4071 billion. Financing bond buyback explains the higher net market borrowings.
Fiscal Deficit, Revenue Deficit and Primary Deficit
Fiscal deficit is the difference between total revenues and total expenditure of the government. Given that the Indian government spends more than it earns it runs a fiscal deficit, which is financed by market borrowings. Government borrowing every year adds to the stock of outstanding debt that is at close to Rs 50 trillion. Given rising government debt, interest cost for the government rises every year (Read our note on Expenditure Budget) that in turn puts pressure on government finances, which in turn leads to fiscal deficit, which again leads to government borrowing and increase in stock of outstanding debt. A classical self-fulfilling cycle.
Fiscal deficit is the difference between total expenditure and total revenue of the government while primary deficit is fiscal deficit less interest costs.
Revenue deficit is the difference between expenditure and revenue on the revenue account. Revenue expenditure does not go into creation of capital assets and hence it is non productive. Effective revenue deficit, which was introduced in 2011-12, reduces from the revenue deficit, government grants to states and other bodies for creation of capital assets.
The government is conscious of the need to bring down levels of fiscal and revenue deficits and has adopted the FRBM (Fiscal Responsibility and Budget Management) Act that sets targets for revenue and fiscal deficit as percentage of GDP. FRBM target for 2018-19 revenue deficit of 2.2%, fiscal deficit of 3.3%. Table 3.
