Cutting off-budget borrowings has raised fiscal deficit guidance

Excluding these two items, fiscal deficit could have been lower by 0.5-1.0 per cent in fiscal 2021 and 0.6 per cent in fiscal 2022, the rating agency's research report said.

New Delhi: Government’s more transparent stand in terms of its accounts has resulted in country’s fiscal deficit taking a longer glide path towards consolidation.

According to a research report by Crisil, with off-budget expenditures such as Food Corporation of India’s (FCI’s) loans from the National Small Savings Fund (NSSF) and government fully serviced bonds now getting accounted for when calculating the fiscal deficit in the more transparent scheme, the fiscal consolidation path may stretch longer.

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Excluding these two items, fiscal deficit could have been lower by 0.5-1.0 per cent in fiscal 2021 and 0.6 per cent in fiscal 2022, the rating agency’s research report said.

Talking about the impact of higher deficit on economy, the report suggests though a large fiscal deficit could be inflationary, given there are underutilised capacities and the economy continues to grow below potential, this may not be an immediate threat.

But sticky inflation, especially core, and surplus liquidity sloshing around can potentially breed trouble, the report said.

On a positive note the report has said that the government’s thrust on public investment (mainly capital expenditure) in the Budget will be positive for growth, not only in the short but also the medium term as it has a higher multiplier effect than revenue spending and augurs well for jobs.

With regard to the bond market, the global analytics firm said that G-sec yields are expected to come under pressure as the market borrowing programme remains huge. Since the central bank plans to stay accommodative, it would also need to keep a close tab on yields, using a broad range of tools as it has been doing so far, it added.