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Analysis of Sansad TV Discussion: ”Disinvestment and Fiscal Deficit”

Context

  • Rating agency ICRA recently observed a miss in the disinvestment target to cause the government’s fiscal deficit to print at ₹16.6 lakh crore, or 7.1% of the GDP in FY2022, overshooting the budgeted target.
  • With the State governments’ fiscal deficit projected at a relatively modest 3.3% of the GDP in FY2022, the general government fiscal deficit is estimated at about 10.4% of the GDP, the agency said.
  • So, the government’s fiscal deficit to print at Rs 16.6 lakh crore in FY2022, exceeding the budgeted amount of Rs 15.1 lakh crore.

ICRA’s Key Observations

  • ICRA in its recent report says that though the government’s gross tax receipts is expected to overshoot the budgeted amount, the shortfall in the disinvestment target this year may lead to a fiscal deficit of around 7 per cent of the GDP.
  • Although the planned ceasing of GST compensation could cause the state governments’ fiscal deficit to rise to the cap of 3.5 per cent of the GSDP set by the Fifteenth Finance Commission, the general government deficit will still compress to 9.3 per cent of the GDP in 2022-23, it observed.

What does low disinvestment mean for Fiscal Management?

The net tax revenue gains to the government will be nullified by the expected large miss on receipts from disinvestment and back-ended spending, especially on those items that were included in the Second Supplementary Demand for Grants, such as food and fertiliser subsidies, equity infusion into Air India Assets Holding Limited, etc.

What is the acceptable level of fiscal deficit?

  • There is no set universal level of fiscal deficit that is considered good. Typically, for a developing economy, where private enterprises may be weak and governments may be in a better state to invest, the fiscal deficit could be higher than in a developed economy.
  • In developing economies, governments also have to invest in both social and physical infrastructure upfront without having adequate avenues for raising revenues.
  • In India, the Fiscal Responsibility and Budget Management Act requires the central government to reduce its fiscal deficit to 3 per cent of GDP. India has been struggling to achieve this mark.

What is a fiscal deficit?

  • The difference between total revenue and total expenditure of the government is termed a fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included.
  • So, “Fiscal Deficit is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure”.
  • In other words, the fiscal deficit is “reflective of the total borrowing requirements of Government”.

What is the significance of fiscal deficit?

  • In the economy, there is a limited pool of investible savings. These savings are used by financial institutions like banks to lend to private businesses (both big and small) and the governments (Centre and state).
  • The significance of fiscal deficit is that if this ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow. A lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
  • So, simply put, a higher fiscal deficit means higher borrowing by the government, which, in turn, mean higher interest rates in the economy.
  • This concern becomes even more significant when, like today, Indian businesses are facing high-interest rates. A high fiscal deficit and higher interest rates at a time like this would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.

What is Disinvestment?

  • Disinvestment means the sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.
  • The government undertakes disinvestment to reduce the fiscal burden on the exchequer, or to raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.
  • In some cases, disinvestment may be done to privatise assets. However, not all disinvestment is privatisation.
  • Some of the benefits of disinvestment are that it can be helpful in the long-term growth of the country; it allows the government and even the company to reduce debt.
  • Disinvestment allows a larger share of PSU ownership in the open market, which in turn allows for the development of a strong capital market in India.
  • Main objectives of Disinvestment in India:
    • Reducing the fiscal burden on the exchequer
    • Improving public finances
    • Encouraging private ownership
    • Funding growth and development programmes
    • Maintaining and promoting competition in the market.

Conclusion

With every passing year, at least from the last three years, the government missed its disinvestment target which is impacting its fiscal targets and remains to be seen what disinvestment target government would settle for in the upcoming Budget.

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