Union Budget 2020-21: Fiscal Deficit Target Maybe Breached

The government may not be able to restrict the fiscal deficit to the Budgeted levels set by Union Finance Minister Nirmala Sitharaman.

Last year, while delivering the Union Budget 2019-20, it was estimated that the fiscal deficit would be 3.3 per cent of the Gross Domestic Product (GDP).

However, a sharp slowdown in the economy, has resulted in tax collections falling dramatically over the last few quarters. Apart from this the cut in corporate tax, has added a burden of Rs 1.4 lakh crores on the exchequer, raising the prospects of elevated fiscal deficit.

It's likely that the fiscal deficit could be around that 3.8 per cent mark, which is a solid up tick over the estimated number of 3.3 per cent.

Recent report suggests that the government is likely to reduce spending for the current fiscal year by as much as Rs 2 lakh crore ($27.82 billion) as it faces one of the biggest tax shortfalls in recent years, a Reuters report has stated.

The government has spent about 65 per cent of the total expenditure target of Rs 27.86 lakh crore till November but reduced the pace of spending in October and November, 2019.

GDP for the quarter ending Sept 30, 2019, came in at a 6-year low and going by high frequency indicators, things are not likely to improve for the quarter ending Dec 31, 2019 as well.

If the economy does not bottom out quickly, it is highly likely that there could be further revenue shortfall, leading to further upward bias on the deficit. In all probability expenditure would be curbed. When government expenditure is curbed it tends to hit the economy even further.

Fiscal deficit projections for Union Budget 2020-21

What could also be interestingly watched in the Union Budget is the fiscal deficit projections for 2020-21. It is highly likely that it could be around the 3.5 per cent mark, though even that could be optimistic.

The one thing that credit rating agencies watch is this number and if this number starts deteriorating, we could have a problem with our sovereign credit rating.

A damage to the credit rating can always be dangerous, as it could result in capital outflows. There is a desperate need at the moment for the economy to pick-up, which will help an uptick in revenues and hence curb the fiscal deficit.