Fiscal deficit: Tough job at hand
The government is confident of meeting the fiscal deficit target for the year and has reiterated that confidence even after the recent excise duty cut on petrol and diesel will lead to a total revenue loss of ~105 billion. ARUP ROYCHOUDHURY writes
The government has been confident of meeting the fiscal deficit target for the year and reiterated that confidence even after the recent excise duty cut on petrol and diesel will lead to a total revenue loss of ~105 billion. Of this, the Centre will bear about ~61 billion, as 42 per cent of the proceeds from duties are passed on to the states.
While the direct tax collections so far are encouraging, other indicators show the Centre has a formidable task. Going by available trends, there could be a shortfall of more than ~1 trillion in its share of the goods and services tax (GST). Adding to that, an estimated additional expenditure of ~380 billion, the government will have to raise nearly ~1.5 trillion through higher-than-budgeted direct tax proceeds, non-tax revenue and disinvestment, and reduce in non-essential spending, if it has to meet its fiscal deficit target of 3.3 per cent of the gross domestic product.
“The government is doing a delicate balancing act with slower than anticipated GST collections as well as additional expenditure commitments,” said Saumya Kanti Ghosh, chief economist with State Bank of India.
The fiscal deficit has already hit 94.7 per cent of the target in the first five months. In absolute terms, it stood at ~5.91 trillion. So, in the next seven months, the government will have to contain its excess expenditure over revenues within ~330 billion to contain the deficit at the targeted level in absolute terms. The proportion of GDP will vary a bit, depending on GDP numbers.
Though the fiscal deficit was higher for the same period last year (at 96.1 per cent of last year’s target), there was slippage in the final target, from 3.2 per cent of GDP to 3.5 per cent. Finance Minister Arun Jaitley had claimed that this was due to GST receipts being a month less. However, the government had effected a cut in the actual capital expenditure by as much as 15 per cent compared to the budgeted estimates. “It is not an easy target to meet and this is not an easy year to meet that target,” said D K Joshi, chief economist with Crisil. The central government’s internal spending estimates show that it expects an additional outlay of ~200 billion just for the newly announced minimum support price obligations for cereals and pulses. This will be over and above the budgeted food subsidy estimate of ~1.69 trillion.
The budgeted fuel subsidy for the year is ~250 billion. However, the government could now pay out an additional ~125 billion for the year on fuel subsidies in light of higher crude oil prices, as reported earlier. The government has announced that it will provide a support of ~20 billion extra for state-run carrier Air India, over and above ~163 billion announced in the Budget. The outlay for Ayushman Bharat could increase by ~35 billion.
Total expenditure for April-August this year is ~10.7 trillion, compared to ~9.5 trillion for year-ago period. And this is even before most of the additional spending burden is realised. The total budget size this year, before accounting for supplementary demand for grants and additional commitments, is ~24.4 trillion.
Analysts said that the year could end with some cuts in non-essential spending, including capital expenditure for ministries and departments which have not spent as much as what was allocated to them.
“If you can’t generate revenue then you have to compress spending, it is now a credibility issue. Within expenditure, it is capital spending where you can compress without any short-term ill effects,” Crisil’s Joshi said.
“The Centre may still look at cutting back capital expenditure. The government may review the capex of the ministries that have not spent to explore a cut back in capital expenditure eventually. It’s critical to adhere to fiscal targets,” said Shubhada Rao, chief economist with YES Bank. “Some risks on the fiscal front are accumulating. We need to expedite disinvestment. The situation will be contingent upon the GST revenue picking up in the second half of the year,” Rao said.
For the April-August period, the central GST has totaled Rs 1.8 trillion. As per data available on the website of the Controller General of Accounts, the highest was ~579 billion for the month of July, and the lowest was ~281 billion in May. The average GST that CGST has raked in for the five months of this fiscal year is around ~370 billion. Going by that calculation, at the current run rate, the CGST for the full year will be ~4.44 trillion, compared to a budgeted target of ~6.04 trillion. The centre’s share of IGST, after adjusting for overlaps, is expected to be ~500 billion, and compensation cess (which will go to states), is expected to be ~900 billion.
Though the September numbers for GST by the finance ministry have also come, the April-August figures have been taken frim from CGA as there is a overlap of IGST numbers with CGST figures in the former set of data.
“On GST, they are running short, the second half we could see seasonal uptick and support in the GST collections. Indirect taxes usually pick up more in the second half because of the festive season,” Rao said.
Analysts also say that the Centre has an option of deferring IGST and compensation settlement to states to after March 31, 2019, just to show in their books that the revenue targets have been healthy. They also agree that direct taxes have been a bright spot so far and that a lot more needs to be done on disinvestment. Essentially, the disinvestment target of ~800 billion has to be exceeded.
Direct tax collection for April-September rose stood at ~4.44 trillion, 14 per cent higher than the previous year. This is in line with the Budget Estimates of 14.4 per cent growth in FY’19. These collections in six months form 38.6 per cent of the annual budget estimate of ~11.5 trillion. This is in line with the trend of six-monthly collections in the last two years. So, the issue is if the pace does not increase, the government may not be able to makeup for expected shortfall in the GST collections from direct taxes.
On disinvestment, the department of investment and public asset management (DIPAM) has managed to rake in ~94 billion for April-August. On tap are a number of initial public offerings of defence and power companies, offers for sale for listed state-owned companies, asset sales, including landbanks and buildings, outright strategic sales, and acquisition of smaller PSUs by larger players in the same space. There will also be further tranches of the two equity exchange-traded fund.
But the mayhem in the markets make the picture look hazy. Analysts are critical of the governmen’t recent action of forcing oil marketing companies to take a hit. “With this move, the givernment id closing down options for divestments from PSUs. No serious investor will ever trust the government if they go back on their commitments,” said Deven Choksey of KR-Choksey Securities. The finance minister’s protestations to the contrary has not cut much ice, it seems.