The Fiscal Deficit and the Budget

Mon, 29 Feb Pre-Open

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It's that day of the year again! The Finance Minister will present the Union Budget in Parliament today. As usual, commentators have gone berserk. View, predictions, and expectations are flying thick and fast. If the media is to be believed, this is the Modi government's make or break budget!

We have a more nuanced view. We have never believed the budget can make or break the economy. Sure some budgets are more important than others. However, at the end of the day, it is merely a document stating the government's financial plan for the coming financial year.

Of course, the budget is important. But in any budget, there are only a few things that really matter. We believe, the Fiscal Deficit is among the most important parts of the budget. The Fiscal Deficit is the difference between what the government's income (via taxes, interest, dividends, disinvestments, etc) and the government's expenses. Expenses are usually higher than income. The difference is the deficit which must be covered by borrowing.

The deficit is expressed as a percentage of GDP. For FY 15-16, it's estimated to be 3.9% of GDP. We believe, the government will achieve this easily enough. But what makes the Fiscal Deficit number important, is the forecasted figure for the coming fiscal year i.e. FY 16-17. Expectations vary between 3.5% - 3.8% of GDP. If the finance minister announces a higher figure, it will be a cause for concern.

Governments around the world are tempted to boost spending. This helps prop up economic growth in the short-term. But this always results in higher debt. This pile up of debt over time, increases the interest burden. About 25% of the Indian government's revenue currently ends up in interest payments on the ever growing debt load. In other words, India is neck deep in debt!

This has happened because successive governments have doled out populist schemes. The money hardly reaches the poor as these schemes are hotbeds of corruption. Only massive administrative reforms can deal with these problems. None seem forthcoming. This is why we will keep a hawk eye on this number when the budget is presented today. You should too.

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