Modi 2.0 has unleashed the fiscal deficit beast

The current Narendra Modi government will have the dubious distinction of ending up with the highest ever fiscal deficit India has even seen

Restoring fiscal deficits (from 4.5 per cent in 2013-14 to 3 per cent of GDP) was a high policy priority of the Narendra Modi government 1.0 (2014-2019). It came close to achieving it, recording a fiscal deficit of 3.4 per cent in the financial year 2018-19.

In contrast to the rigorous fiscal discipline during the first term, Modi 2.0 (2019-2024) has abandoned the approach in the second term. Taking the 2023-24 Budget numbers into account, Modi 2.0 will end up with a massive fiscal deficit average of 6.5 per cent of GDP.

No Union government since 1991, the year when the economic and fiscal reforms began and fiscal deficits came to be recognised, has run fiscal deficits of such high order.

On what did the government spend the large fiscal resources which has led to this high deficit? Have these expenditures been fiscally productive? Will these fiscal deficits tie the hands and feet of the future Union governments?

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Fiscal Deficit Record

The amended Fiscal Responsibility & Budget Management (FRBM) 2018 Act enshrined a fiscal deficit limit of 3 per cent of GDP from FY2020-21. In the very first year (FY2019-20), the Government of India seemed to throw fiscal deficit out of the window incurring a fiscal deficit of 4.7 per cent of GDP.

It made some noises signalling the return to a fiscal discipline path in Budget 2020-21 by promising to keep the fiscal deficit under 3.5 per cent of GDP. However, COVID-19 provided a good excuse. Claiming credit for embarking on a large fiscal stimulus programme, the Union government revised the FY2020-21 fiscal deficit to an unprecedented level of over 9.2 per cent of GDP.

The fiscal deficits of 2021-22 and 2022-23 exceeded 6.7 per cent and 6.4 per cent of the respective GDPs.

The fiscal deficit for 2023-24 has been proposed at 5.9 per cent of GDP in the Union Budget. Developments on the revenue and GDP front indicate that the fiscal deficit will most likely exceed 6 per cent of GDP in 2023-24 as well.

Actuals of the first three years (2019-22), the revised estimates of 2022-23, and the budget estimates of 2023-24 amount to an average fiscal deficit of over 6.5 per cent!

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Governments And Fiscal Deficits

The Narasimha Rao (1991-1996) government began controlling fiscal deficits. From the high of 7.6 per cent in 1990-91, it averaged fiscal deficits of 5.5 per cent in its five-year term.

Three more governments with 5-year terms before Modi 1.0 took over in 2014 also attempted to rein in fiscal deficits. The Atal Bihari government (1999-2004) averaged a fiscal deficit of 5.3 per cent and the first Manmohan Singh government (2004-2009), despite the 2008 global financial crisis, recorded a fiscal deficit average of 4 per cent. Despite running a lax stimulus policy, Manmohan Singh 2.0 averaged a fiscal deficit of an average 5.2 per cent.

The short-lived HD Deve Gowda and first Atal Bihari government (1998-99) recorded fiscal deficits of 5.2 per cent and 6.3 per cent respectively in their tenures.

Modi 1.0 delivered the best performance since 1991 clocking a fiscal deficit average of 3.6 per cent of GDP. Modi 2.0 delivered the worst fiscal deficit performance of 6.5 per cent of GDP.

The award for the best and the worst performance goes to the government led by the same Prime Minister! There cannot be a better proof of an about-turn in fiscal deficit policy and approach.

Where Did Government Spend

An additional 3.5 per cent borrowings provided Modi 2.0 additional fiscal resources of more than Rs 42 lakh crore during the five-year period. The Centre splurged this money on five major types of expenditures.

First, the government cleared accumulated food subsidies and fertiliser subsidies in 2020-21 and after.

Second, the government relieved the Indian Railways and the National Highways Authority of India (NHAI) of borrowing from the market for infrastructure funding by providing large-scale budgetary funds.

Third, the government made sham equity investments in organisations such as Air India Asset Holdings Ltd and BSNL/MTNL to accumulate losses, debt write-downs, VRS expenditure, and to pay the licence and other fees to itself.

Fourth, the government expanded several freebies programmes in a big way — PM Kisan Samman Nidhi, higher and free foodgrains, and fertilisers at ridiculously low prices despite massive increase in their costs.

Fifth, the government-funded spiralling interest liabilities caused by fast-rising debt stock.

Hardly any of these expenditures are of a commercial or fiscally productive nature. Either such expenditures were plain revenue expenditures or phoney capital expenditure.

Will Pay Dearly

Barring clearance of fiscal arrears, all other expenditures undertaken by Modi 2.0 will force future governments to keep the tap running in times to come. The Indian Railways, the NHAI, and telecom companies have become financially bankrupt and unworthy of raising funds from the market. The ‘capital expenditure’ unleashed will be impossible to scale back.

The freebies (food, farmers, fertilisers) have got so deep-seated that no future governments would dare to roll them back. Instead, they might be tempted to enlarge them.

The debt stock has crossed Rs 150 lakh crore and will keep galloping in future. Payment of interest equal to the normal fiscal deficit limit of 3 per cent of GDP annually is now on autopilot.

The hard reality is that the fiscal deficit beast has been unleashed and incoming governments will find it highly difficult to come out of the fiscal logjam.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘Explanation and Commentary on Budget 2023-24’.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.