Modi govt has mostly failed in meeting fiscal targets set in Budgets

It seems the glide path given in budgets has been the govt's intention, but the actual conditions turned out to be quite different

The Modi government has never been able to meet the fiscal deficit targets it sets for the next two years in the nine budgets, except for 2016-17, given in the Budget for 2015-16. Even in this case, the original target given in the Budget for 2014-15 was three per cent of the gross domestic product (GDP), which was widened to 3.5 per cent in the next Budget and realised.

It is widely expected that the Budget to be presented on February 1 would more or less meet the fiscal deficit target of 6.4 per cent of GDP for FY23 due to higher tax collections and nominal GDP than expected. However, the suggestion to keep the deficit below 4.5 per cent of GDP by 2024-25 may be revised. The Budget refrained from giving specific numbers for the next two years, as has been the practice till 2020-21. However, it says that the Centre will try to keep the fiscal deficit below 4.5 per cent of GDP by 2024-25. Earlier, the fiscal consolidation paper used to give such a specific target for the next two years.

It seems the glide path given in budgets has been the government's intention, but the actual conditions turned out to be quite different. Targets given till the Budget for 2020-21 were three and 3.6 per cent of GDP. The actual realisation was also in the range of 3.4 to 3.9 per cent till 2018-19.

So, the deviations were there but only a little. It was when the economy started slowing down from 2019-20, even before the Covid-19 pandemic hit, that the targets were substantially far off than intended.

For instance, the target kept for 2019-20 was 3.1 per cent and 3 per cent in the Budgets for 2017-18 and 2018-19, respectively, but it turned out to be 4.6 per cent.

Afterwards, the target was kept at three per cent for 2020-21 in the Budgets for 2018-19 and 2019-20. However, the deficit widened to a whopping 9.2 per cent of GDP as the government faced shock from the first wave of Covid-19, brought transparency in subsidising Food Corporation of India and brought extra budgetary resources of the Centre over the line.

The Budget for 2021-22 also had a fiscal deficit of 6.7 per cent of GDP as the second wave hit the country.

While the target was now to keep the deficit below 4.5 per cent of GDP by 2024-25 from 6.4 per cent in the current financial year, it seems those would be missed now. The target broadly means that it should be one per cent of GDP cut in each financial year -- 2023-24 and 2024-25. However, most experts peg the fiscal deficit at 5.8 per cent of GDP for 2023-24.

Icra chief economist Aditi Nayar said," We foresee the domestic recovery to be able to support a reduction in the fiscal deficit to 5.8 per cent of GDP in FY24."

She said that with the extent of volatility created by the pandemic and global disruptions, medium-term projections have become exceedingly fraught with uncertainty.

"I don't think 4.5 per cent should be taken as carved in stone. This requires a cut in the fiscal deficit by one per cent of GDP every year. That is a very substantial amount," former chief statistician Pronab Sen said.

He said the downward glide path should continue but not in such large chunks. "Maybe going from 6.4 per cent to 5.75-5.8 per cent should be targeted for next fiscal year," Sen said.

Bank of Baroda chief economist Madan Sabnavis said missing targets is due to the unusual economic environment.

"This has necessitated extra spending on exigencies which means keeping prudence aside as the job of the government is to provide relief when required. In some years revenue goes awry when GDP slumps. Hence we should treat the path as intention. Actual action will be driven by circumstances which are the right way," he said.