Budget 2020 explained: How does the government finance its deficit
Now that the memes critiquing the budget and interviews explaining it are almost over, let’s look at whether the budget is really going to help India in 2020 or not.
The report card: Deficit to borrowings a vicious circle
Union Budget 2020 increased to Rs. 30.42 lakh crore from Rs. 26.98 lakh crore in Union Budget 2019. Whereas, the earnings expected are Rs. 22.45 lakh crores, as a result expected borrowings are thus Rs. 7.96 lakh crores.
The fiscal deficit this year is at 3.5 % of GDP, ideally it should be maintained at 3.5 % of GDP, as prescribed under the Financial Responsibility and Budget Management Act (FRBM) guidelines.
The Indian government borrows money to finance the many initiatives it takes to fund educational institutions, build schools and colleges, infrastructure projects, roads, railways and metros across cities and towns.
Primary deficit
In 2020, the government has an outstanding interest payment of Rs. 7.08 lakh crore. This year, borrowings that are available for productive purposes, i.e the primary deficit of the country is Rs. 88134 crores. This means that only 0.4% of GDP is available for utilization for projects of the government.
Disinvestment to the rescue
The government plans to raise Rs.1.20 lakh crore by selling its stake in public limited companies. And another Rs.90 thousand crore by selling its stake in public sector banks and financial institutions.
Tax revenue
The government plans to collect Rs.16.35 lakh crore in tax revenue in 2020-21. This amount is lower than last year’s budget estimates of Rs.16.49 lakh crore.
The government also plans to get Rs.3.85 lakh crore in non tax revenue. Income Tax, Corporation Tax and GST are expected to contribute 17%, 18% and 18% to revenue respectively.
Decreased capital expenditure
The government has earmarked Rs.4.12 lakh crore for capital expenditure, which is 13.5% of the total expenditure.
Increase in revenue deficit
Revenue expenditure is expenditure incurred by the government for salary, pension, interest payments etc on its employees.
For Union Budget 2020-21, the government estimates Rs. 20.02 lakh crore in revenue receipts and revenue expenditure is Rs.26.30 lakh crore.
Verdict: Problems galore
Borrowings to fund fiscal deficit
Market borrowings will again be the primary source for the government.
Along with market borrowings, the government can also look at raising funds via securities against Small Savings, Other Receipts (Internal Debts and Public Account), Draw Down of Cash Balance.
Falling tax revenue
Over the years it has become pretty clear that the share of tax revenue has been falling, Tax and non tax revenue only help meet ⅔ of the government’s expenditure requirements. From failing to meet income tax collection estimates, to GST still facing bottlenecks, looks like the government is looking more and more towards market borrowings to bail it out.
Moving away from FRMB guidelines
To help the economy recover from a slowdown, the government needs to invest in priority development areas, however, in doing so it will increase the fiscal deficit, which takes it away from the FRMB guidelines set. As seen in the budget instead of increasing its capital expenditure projects that will contribute to the economy,the government seems to be increasing its expenditure on the revenue side.
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