Govt may contain fiscal deficit at 3% in FY20 after RBI's surplus transfer

The government may be able to contain its fiscal deficit at 3 per cent of gross domestic product (GDP) in 2019-20 (FY20) following the Reserve Bank of India (RBI)’s surplus transfer, a top government official said on Monday.

“The government will be able to reduce the fiscal deficit by 0.3 percentage point this fiscal year thanks to the RBI’s transfer of Rs 1.76 trillion,” the official said, requesting anonymity.

Alternatively, the government may use the surplus funds to provide a stimulus package to revive economic activity — a step it resisted from taking when Finance Minister Nirmala Sitharaman announced a slew of measures to boost the slowing economy on Friday.

“We may also use this money to boost infrastructure or social sector spending,” the official said.

A source said the government will take a call within a week.

The government is expected to get an additional revenue of Rs 58,000 crore - after adjusting the interim dividend transfer of Rs 28,000 crore - due to the RBI's decision on Monday as it had budgeted Rs 90,000 crore as dividend from the RBI in 2019-20.

If the government chooses to rein in its fiscal deficit, it would be the first time that it would be able to do so since the Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003.

Originally, the government planned to bring the deficit down to 3 per cent of GDP by 2008-09. It had pegged the deficit at 2.5 per cent in its Budget Estimates (BE). However, stimulus provided to the economy to offset the ripple effect of the global financial crisis had widened the deficit to 6 per cent.

In the BE for FY20, the deficit is pegged at Rs 7.04 trillion — 3.3 per cent of GDP against 3.4 per cent in 2018-19 (FY19). With GDP at current prices assumed to be Rs 211 trillion, 3 per cent would be Rs 6.33 trillion per cent. 

Within the first three months of FY20, the fiscal deficit had touched 61.4 per cent of the BE. This is not as high as it seems — in the year-ago period it was 68.7 per cent.

The fiscal deficit target seemed challenging with subdued tax collections. Despite a cut in tax projections in the Budget, presented in early July, over the Interim Budget projections, tax revenues are estimated to grow 25 per cent year-on-year.

Gross (direct plus indirect) tax collection in FY19 fell short by Rs 1.7 trillion, or 7.5 per cent, of the Revised Estimates for the year. The current economic downturn makes the challenge steeper.

As for direct taxes, growth in collection up to mid-August has been 4.69 per cent, against the full-year target of 17.3 per cent.

Similarly, goods and services tax (GST) collections fell short of the target. Overall GST collections (state as well as the Centre) are projected to stand at Rs 1.3 trillion a month. However, no month yielded that much revenue.

A surcharge levied on foreign portfolio and domestic investors in the Budget was withdrawn by FM Sitharaman on Friday, but that would hit the exchequer by only Rs 1,400 crore.