The Government should take recourse to borrowings only for the creation of long-term assets. This will help generate income streams that can help in servicing the loans

Recently, the International Monetary Fund (IMF) has forecast that India’s general government debt - it comprises the debts of the Centre and states – will overshoot 100 per cent of the GDP (gross domestic product) by the financial year (FY) 2027-28. Responding to this, the Ministry of Finance (MoF) clarified that this wasn’t under a ‘baseline scenario’ – a jargon to describe normal economic conditions. It added the IMF was referring to a ‘worst-case scenario’ wherein a global shock would equally affect all countries.

Is the government’s debt sustainable?  

The government’s debt is linked with how it manages its total expenditure vis-à-vis its total receipts or fiscal deficit (FD) which is excess of the former over the latter. The expenditure and receipts are broadly of two types viz. revenue and capital.

Revenue expenditure (RE) is essentially consumption expenditure which does not result in the creation of assets. It includes expenses for the normal running of government departments and various services, interest charges on debt incurred by the government, subsidies and so on. Capital expenditure (CE) includes the money that the government spends on long-term assets such as property, plant, and equipment.

Revenue Receipts (RR) are receipts that neither create any liability nor lead to any reduction in the assets of the government. These comprise tax and non-tax receipts, duties and fines, and interest and dividends receipts on government investments and assets. Capital receipts (CR) are those receipts that either create liabilities or reduce the asset value of the government. These are loans raised by the government to fund long-term developmental needs.     

Ideally, RR should fully pay for the RE implying that revenue deficit (RD) – the difference between RR and RE – should be zero. The government should take recourse to borrowings only for the creation of long-term assets. Spending in this manner will help generate income streams that can help in servicing the loans thereby making such debt sustainable.         

In reality, RR have consistently fallen short of RE leading to a revenue deficit which meant that the government was borrowing merely to finance consumption expenditure. Besides, even the loans taken for financing CE were not productively used. The result was an increase in debt to an unsustainable level. As a result, even in 2003-04 when the Fiscal Responsibility and Budget Management (FRBM) Act (2003) was passed by the then Vajpayee-led NDA – government, interest payments accounted for one-third of the RE. 

Under the FRBM Act (2003), the Vajpayee government promised the elimination of RD by the year 2008. It also committed to reducing FD to 3 per cent of the GDP. Against these pledges, during 2008-09, RD was 4.7 per cent whereas, FD was 6.2 per cent.

In his budget speech for 2016–17, the then Finance Minister Arun Jaitley announced the intent of the Modi government to review the FRBM) Act (2003) with a view to making the FD target more flexible. For this, he had set up a committee under Dr N K Singh. The committee recommended a “glide path” for the next six years, i.e., from 2017–18 to 2022–23.

It recommended an FD target of 2.5 per cent, RD of 0.8 per cent, a combined Centre-state debt ceiling of 60 per cent, and a central debt ceiling of 40 per cent for the terminal year, i.e., 2022–23. Further, it fixed 3 percent FD to be achieved during 2018–19. The committee also allowed the Union Government to breach the target - by up to 0.5 per cent - in the case of “far-reaching structural reforms with unanticipated fiscal implications.”

In the amendment to the FRBM Act in the Finance Bill 2018–19, even while retaining the “escape clause” to cover unanticipated events, the government adopted the glide path of achieving a 3 per cent FD by 2020–21 instead of 2018–19, which was mooted by the committee. Further, it set the debt limit at 40 per cent for the Centre to be reached by 2024–25 instead of the mandated 2022–23.

The relaxation in the glide path may be seen in the backdrop of the government missing the FD target for 2017–18 by 0.3 per cent and seeing no hope of achieving 3 per cent during 2018–19, as recommended by the committee.

In the Budget for 2020-21, the finance minister (FM) Nirmala Sitharaman had already invoked the escape clause of the FRBM (Amendment) Act to alter the FD targets for 2019-20 from 3.3 percent as provided in the Budget to 3.8 percent in the revised estimate and for 2020-21, from 3 percent – as per the glide path required under the Act – to 3.5 percent.

Seen in relation to the target set by the N K Singh Committee or even to the FRBM (Amendment) Act, the performance of the government had been off the mark. For instance, during 2018–19, the FD was 3.7 per cent against the 3 per cent required as per the Singh Committee. If deferred subsidy payments (DSPs) are also included (in those years, substantial amounts of major subsidy bills, viz., food, fertilizers, and fuel, were kept pending), the FD would be 5.7%. Likewise, for 2019-20, including DSPs, the FD would be 5.1 per cent.

Due to Corona pandemic, the year 2020–21 saw plunging revenue and ballooning expenditure. As a result, the FD zoomed to 9.1 per cent against BE of 3.5 per cent. Being an exceptional year, a comparison with the glide path may not be apt.

In the following year, even as the pandemic waned and the economy rebounded, in her budget speech for 2021-22, Sitharaman fixed the FD target at 6.9 per cent saying her goal was to achieve 4.5 per cent by the year 2025-26. The actual FD for 2021-22 was lower at 6.7 percent. For 2022-23, she set the target at 6.4 per cent describing this as ‘advancing on the road to fiscal consolidation’. The actual was precisely at 6.4 per cent. For 2023-24, she kept the target at 5.9 per cent. It is likely that even this would be achieved.         

From the above, the finance ministry exudes confidence that the Centre is “on track to achieve its stated fiscal consolidation target” of reducing FD to 4.5 per cent by 2025-26. This is misleading. To reset the fiscal trajectory making it substantially relaxed and then claim that fiscal numbers are well on track looks amusing. Let us not forget that even as per the FRBM (Amendment) Act, the Centre should have achieved 3 per cent in 2020-21.

Against this, the actual FD during 2021-22 and 2022–23 was more than two times whereas during the current year, it is expected to be nearly twice this level. The RD at 4.1 per cent during 2022–23 and 3 per cent during 2023-24 (expected) is 4 to 5 times the 0.8 per cent level as recommended by the NK Singh Committee. The debt to GDP ratio of the Centre is around 60 per cent against the 40 per cent mandated as per the amended Act.

As per the FRBM Act (2003), the FD was to have come down to 3 per cent by 2008. Against this, we are talking of 4.5 per cent by 2025-26. As per the Act, RD was to become ‘Zero’ by 2008. During 2023-24, it is stuck with 3 percent. It shows how much the Centre has lagged behind in managing its fiscal situation. True, but for Modi’s efforts in boosting tax revenue, the situation would have been much worse. Nonetheless, a lot more needs to be done especially by slashing RE.     

(The writer is a policy analyst; views are personal)