CII wants government to contain fiscal deficit at 6.4%

The Confederation of Indian Industry (CII), one of India’s foremost industry bodies, has urged the government of India to stick to the fiscal deficit target of 6.4% for FY23 and even try to cut it further to 6% by FY24. Fiscal deficit refers to the budgetary deficit and the gap has to be filled up with borrowings. While additional expenditures will increase the fiscal deficit, additional revenues can reduce the targeted fiscal deficit. In the current year, it has been a mixed performance with some overshooting on the spending side, but fortunately there has been some outperformance on the revenue side too. Here is how.

When FY23 started, the government decided to go all out to control inflation. Obviously, while inflation is a monetary phenomenon, controlling inflation has a fiscal cost. One of the first things that the government did to support RBI rate hikes was to reduce the duties on select imports to reduce local prices. However, the duty reduction had a cost and there is a huge overshoot on the food and fertilizer subsidy bill this year. At that point, the finance minister had cautioned that fiscal deficit could jump back to 6.9%. However, with direct and indirect tax revenues also buoyant, the hopes is that fiscal deficit may be reined in.

Now, the CII has called for the government to stick scrupulously to its fiscal deficit target if 6.4% and now allow any overshooting on that. CII suggests that, to meet any revenue shortfalls, the government should try and focus on disinvestment of public sector enterprises to raise funds. That would boost revenues without putting pressure on the fiscal deficit. However, the market conditions have been far from satisfactory. The government has put off the sale of BPCL due to unfavourable valuations. On the IPO front, the mega IPO of LIC has been an underperformer post listing and the government would be cautious.

This suggestion was made by CII to the Finance Minister, Nirmala Sitharaman, in the first pre-Budget meeting with the trade bodies. CII was emphatic that in the larger interests of economic stability, the fiscal deficit should not be allowed to spill over from 6.4% and even suggested to target 6% for FY24. A high fiscal deficit has several ramifications. Firstly, foreign investors look at high fiscal deficit in a negative way as it reeks of fiscal profligacy. Secondly, high fiscal deficit also puts pressure on the currency value and with the rupee under pressure, this is bare minimum the government should do. Finally, a very high fiscal deficit level is also a factor for making the rating agencies cautious about any rating upgrades.

The CII appreciated the fact that the government had stuck to its core in encouraging capex and also funding subsidies on food and agriculture. CII underlined that the aggressive capex by the government was the factor that had held up India’s GDP growth even during tough times. Now, CII has suggested that the Budget 2023, which will be announced on February 01st next year, should increase capital expenditure to Rs10 trillion from Rs7.50 trillion in the current FY23. However, the data presented by the Controller General of Accounts (CGA) has underlined that the government revenue gap this year for FY23 is nearly 18% higher when compared to the first half of the previous fiscal year FY22.

However, the performance on the disinvestment front has been far from satisfactory. In the last 3 years, the Indian government has been consistently falling way short in its disinvestment targets. This year, the target is very conservative at Rs65,000 crore. However, after the LIC IPO and the shelving of BPCL, it is doubtful how much of the target it can really achieve in this year. While the government expressed the intent to privatise most state-run companies, including banks, miners and insurers; market appetite has bene limited, Apart from selling Air India to the Tata group, there has been little progress on strategic sale. That is likely to be an overhang as the government tries to curb fiscal deficit.