InvestorQ : I have a question on fiscal deficit? I understand it is high for FY21 due to COVID-19 but why is the figure so high for FY22 also?
vaishnavi mhatre made post

I have a question on fiscal deficit? I understand it is high for FY21 due to COVID-19 but why is the figure so high for FY22 also?

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vidhya Laxmi answered.
4 weeks ago
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According to the budget statement by the Finance minister, the fiscal deficit for the current financial year 2020-21 is expected to touch Rs.18.49 trillion or 9.5% of the full year GDP. This is nearly 2% more than the most pessimistic estimate put out by economists. That is because the tax collections are expected to fall short by 22% this year.

One must remember that the actual number would have been much worse had it not been for the sharply higher excise duty collection went of Rs.3.61 trillion. Now excise duty has been largely subsumed into GST but excise and customs duties on oil and liquor still remain. The series of spikes in excise on petrol and diesel helped to reduce the stress.

That brings us to the big question you raised about why is the deficit so high in 2021-22. The answer lies in how the food subsidy given to Food Corporation of India or FCI is treated. The government, in the budget, had taken a conscious step to move food subsidy into their own books rather than asking the FCI to borrow on its behalf. This is a more transparent practice.

FCI buys rice and wheat directly from farmers and sells it at a discounted price to people via the PDS. Subsequently, the government compensates FCI for this subsidy. The problem was that the government never really full compensated the FCI but instead asked FCI to borrow from the National Small Savings Fund to meet the gap.

In this 2021 budget, the government has opted to discontinue this practice and will now take on subsidies as part of its overall budget and provide for the same. As a result, the food subsidy offered to the FCI this year has spurted to Rs.3.44 trillion as against a mere Rs.75,000 crore last year. This was the reason that pushed up the deficit for the FY22.
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