Fiscal deficit may rise to 3.7% of GDP
Centre may have to go for spending cuts and off-budget borrowing
The big-ticket corporation tax relief announced by Finance Minister Nirmala Sitharaman is likely to severely derail the government’s fiscal consolidation plan, and reverse the fiscal balance achieved over the past three years.
Though the stimulus has the potential to boost investments in the medium term, the immediate revenue loss could worsen the Centre’s fiscal deficit, from the budgeted 3.3 per cent of gross domestic product (GDP) to 3.7 per cent of GDP — a massive 40-basis-point increase. It was stabilised at 3.4 per cent since 2016-17.
An optimistic estimate of revenue shortfall of ~1 trillion in the income tax and the goods and services tax (GST) has been assumed in this calculation.
A further shortfall owing to slowdown could worsen the fiscal deficit situation. In an unlikely scenario where the government manages to achieve budgeted revenue targets, the fiscal deficit would still reach 3.45 per cent of GDP, calculations show.
S&P Global termed this move a “credit-negative development”, Reuters reported after the announcement.
Public sector enterprises and government-owned banks may register stronger profits, and likely pass on higher-than-budgeted dividend to the Centre. Windfall non-tax revenue from the RBI has already provided a fiscal breather to the Centre.
A combination of higher dividends, financing public enterprises through off-budget borrowings, lower spending in certain schemes and cuts or saving in expenditure will help the Centre to reduce the quantum of fiscal slippage from the budgeted fiscal deficit target.
A low rate of fund outflow to bigticket spending schemes would also assist in containing the slippage.
“A relief of ~1.45 trillion will make the tax collection target realistic, bringing the required growth rate down to 5 per cent, which is the current run rate,” said a government official.
Direct tax collections have grown by just 5 per cent till mid-september this fiscal year, and would have required a perilous growth rate of 27 per cent for the remaining half of FY20 to achieve the target. The tax department is of the view that in light of these announcements, it will be a challenge to even maintain a collection growth rate of 5 per cent this year and the Budget estimates are likely to undergo a serious revision at the RE (revised estimates) stage.
Though the loss in gross tax revenue would be ~1.45 trillion, the Centre’s net loss would be nearly ~84,000 crore, as 42 per cent of the loss would be borne by the states. Similarly, a shortfall of ~1 trillion in collection of direct tax and goods and services tax (GST) vis-a-vis the Budget estimate would dent the Centre’s finances by ~58,000 crore.
Taking into account the ~58,000crore gain to the Centre’s kitty from the Reserve Bank of India (RBI), the overall fiscal loss to the Centre would be around ~84,000 crore. Assuming the nominal GDP to be ~209 trillion, this loss will raise the fiscal deficit by 40 basis points, or 0.4 per cent.
Experts and economists told Business Standard that turnaround in demand is key to accentuate investment and improve tax compliance. This is the reason the reformist move might not result in immediate improvement in direct tax collections this year. Real impact on collections will only be visible two-three years down the line. Former chief statistician Pronab Sen said the cut was a pure supply-side measure, whereas the problem was in demand. “As for existing companies, the will not help improve demand, and will lead to companies keeping a large chunk of profit,” he said.