How did previous Budgets underestimate the fiscal deficit? 1
The magnitude of fiscal deficit is decided by a set formula. This is the difference between total spending by the government and the sum of revenue receipts, recovery of loans and other receipts. This number, when taken as a ratio of nominal GDP is the most widely used metric of the fiscal deficit. How did previous budgets underestimate the fiscal deficit then? This was achieved by shifting government spending to extra budgetary resources (EBR). One example can make this clear. The Food Corporation of India (FCI) is the government agency which carries out food procurement at Minimum Support Prices (MSPS). The procured grain is then distributed through the Public Distribution System at much lower prices. The government is supposed to reimburse FCI for the difference between its economic cost of procurement and storage and the issue price of food grains. Ideally, this amount should go in the calculation of food subsidy in the budget. However, the government had been shifting a large part of this outside the budget calculations and funding it through loans from National Small Saving Funds. To be sure, food subsidies were not the only item where spending was taken outside the budgetary calculations. The budget has given details about the amount of spending which was diverted to EBR from 2016-17 onwards. Adding the EBR component of spending with the reported fiscal deficit figures can tell us about the fiscal deficit for the past years. The actual fiscal deficit-gdp ratio was 17.2% more than the reported number in the 2020-21 BE estimates. Because the off-budget spending component has fallen sharply in the 2021-22 Budget Estimates (BE) numbers, the reported and actual fiscal deficit ratio has converged. Indeed, despite a lot of past dues being cleared, EBR still totalled up to ₹1.26 lakh crore in the 2020-21 RE, but is only ₹30,000 crore in the budget for 2021-22.