By Sravya Vemuri
The government, on Wednesday, announced to cut the additional borrowing in the fiscal year 2017-18 from ?50,000 crore to ?20,000 crore. This was due to a sharp rise in the bond yields, which was a consequence of higher government borrowings.
The cut in government borrowing
According to a Bloomberg report, the central government is expecting an additional dividend payment from the Reserve Bank of India (RBI). However, the RBI has not yet confirmed the payment of additional dividends.
In a press release by RBI in August 2017, the central bank said that it would transfer ?30,659 crores to the government in the form of dividends. The dividend was not only half of the amount paid by RBI in the previous years, but also much lower than the ?58,000 crores mentioned in the union budget. With the cut in the government’s borrowings, the fiscal deficit is now down to six lakh crores.
Will this help the government reach its fiscal target?
The government planned to raise additional market borrowings as a way to meet the revenue shortfall due to the implementation of Good and Services Tax (GST). However, this is seen as an impediment in the government’s fiscal path. Until the end of November 2017, the fiscal deficit was already breached, touching 112 percent of the budget estimate for 2017-18 due to higher expenditure.
A higher fiscal deficit implies that the government is unable to meet its expenditure and hence has to raise the tax rates in order to increase its revenue collection. This would result in increased inflation, which in turn is extremely detrimental to the economy. It also stalls the growth of the private sector as the companies are unable to borrow adequately. The households are affected in terms of personal loans and other purchases.
Hence, the announcement comes as a ray of hope in meeting the fiscal target.
Further steps to be taken
The Fiscal Responsibility and Budget Management (FRBM) committee, constituted in May 2016, in its report has suggested that the fiscal deficit should be brought down to 2.5 percent by 2022-23. The government has to stick to the framework in order to lower the debt burden over time and to support India’s credit profile. Above all, political support is needed to make the legislation effective.
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