Living on hope

Meeting the fiscal deficit target looks challenging

India appears to be entering another period of demand-driven overheating. Both the current account deficit and the fiscal deficit appear to be slipping, driven by government expenditure and rising global crude oil prices. This is a dynamic that is familiar from past such episodes, and the government has to be careful that it does not halt the incipient investment recovery before it properly begins. Last week, the data from the Controller General of Accounts showed that the Union government’s fiscal deficit had reached ~5.91 trillion in the April to August period of the year, which is over 97 per cent of the full-year target. In the past, it has been hoped that bunching tax payments towards the end of the year could cause this imbalance between spending and revenue to go down. Something similar may happen this year, but an emphasis on early and efficient collection of taxes means that the relative magnitude of the end-year spike may be less than earlier.

Problems are visible both on the revenue and the expenditure fronts. Receipts in this period were just over 26 per cent of the budgeted amount. Although it has been over a year since the goods and services tax (GST) was introduced, questions swirl about how much it will sustainably bring in. The Centre’s habit of hanging on to components of the GST that it is technically supposed to distribute — or, at any rate, to not spend — is complicating analysis. Although the government hoped for ~1 trillion GST collection a month, average collections have been much below that figure, and Finance Minister Arun Jaitley has hinted that there may be a full-year shortfall. His commitment to honour the fiscal deficit targets is welcome, although he has implied that the government may have to rely on direct tax buoyancy in order to do so. Mr Jaitley has talked about exceeding the non-tax revenue target set in the Budget. But that looks to be a somewhat optimistic assessment. The ongoing turmoil in the markets is going to make the task of disinvestment that much more challenging. This puts the revenue side under considerable stress.

Meanwhile, there has been little effort to contain expenditure. Political compulsions in an election year are clearly making themselves felt. Last week, the minimum support prices for certain agricultural products were increased. The economic affairs secretary has argued that the impact may range from ~100 billion to ~300 billion. Only the lower end of that range will have no fiscal implications. Meanwhile, the government has also abandoned its claim to the independent setting of the fuel prices, by asking oil-marketing companies to absorb “underrecoveries” on their sales, and also by cutting the excise duty. This will put further pressure on the fiscal numbers. This pressure will not ease if the price of the Indian basket of imported crude oil continues to increase — which it will even if the crude oil price internationally stays the same but the rupee extends its slide against the dollar. Overall, while the government’s record on fiscal prudence lends credibility to Mr Jaitley’s assurance that the deficit targets will be met, circumstances are making this look like an increasingly difficult task.