Govt to overhaul fiscal roadmap, may aim budget deficit at 4% of GDP by FY26

The COVID-19 pandemic is set to change the central government’s medium term-fiscal roadmap. From an expected fiscal deficit of 7-8 per cent of gross domestic product in 2020-21, the Centre may follow a glide path which will bring down the budget deficit to 4 per cent of GDP by 2025-26, Moneycontrol has learnt.

This means that the long-standing medium-term fiscal deficit target of 3 per cent of GDP, as mandated by the Fiscal Responsibility and Budget Management Act, no longer holds. The above-mentioned changes will require amendments to the FRBM Act through the Finance Bill, 2021.

Though the FRBM Act came into being in 2003, the medium target has never been met.

Fiscal deficit or budget deficit is the difference between a government’s expenditure and revenues. When revenue is higher, the budget is seen as fiscal surplus. Fiscal deficit is measured as a percentage of real GDP and is the most important measure of the health of a government’s balance sheet. It is tracked keenly by investment banks, economists markets, rating agencies and sovereign bond investors.

“Aiming for a 3 per cent medium-term target is not possible now. This year the deficit can go up to 8 per cent. In the next five years, even if we achieve somewhere around 4 per cent, that will be good enough. We have to spend again in 2021-22, a lot of spending commitments, to revive the economy,” a top government official told Moneycontrol.

It is understood that a relaxed fiscal roadmap for the Centre in light of the pandemic has been suggested by the Fifteenth Finance Commission. The Commission, whose report for 2021-22 to 2025-26 will be tabled in Parliament along with the budget, is learnt to have given the Centre breathing space till 2025-26, and may have recommended a fiscal deficit target range for each year of its award period, till 2025-26, instead of a single number.

For the current year, the pandemic and the slowdown in the Indian economy, especially in the first half of the year, have led to a drop in tax and non-tax revenue for the government, compared to what was expected. Even an encouraging recovery in the second half may not be able to bridge that shortfall.

On the expenditure front, the Centre’s own additional outlay on the Rs 29 lakh crore worth of COVID announcement (Gareeb Kalyan plus three sets of Aatmanirbhar Bharat announcements) is said to be as high as Rs 4 lakh crore. All this means that the budgeted fiscal deficit target of 3.5 percent for 2020-21 will not be met.

For 2021-22, Finance Minister Nirmala Sitharaman has said that the budget will see a massive public sector investment and expenditure push, including on infrastructure projects and the health sector. She has also said that fiscal considerations will be kept aside. This means that a disciplined approach is unlikely next year.

The markets have factored in a fiscal slippage this year and next financial year, with an expectation that the finance minister, in her budget, will spell out a new fiscal roadmap for the medium term.