Risks of revised estimates

How a potential fiscal deficit of 4.65 per cent of GDP was brought down in the 2019-20 revised estimates

Acloser look at the expenditure numbers presented in the Union Budget for 2020-21 offers fresh insights on how the Union government has tried to manage its finances for the current year. They also add a new dimension to the government’s efforts to reduce expenditure in the current year to restrict the slippage in fiscal deficit to only 0.5 percentage point.

The need for slashing expenditure in 2019-20 was acute as the government’s revenue estimates, provided in July 2019, went completely awry. Net tax revenues fell short by ~1.45 trillion and disinvestment revenues were lower than the estimates by ~40,000 crore. The total shortfall was ~1.85 trillion or 0.9 per cent of gross domestic product (GDP).

In addition, there was the problem of excess expenditure under various heads like grants to Union territories, defence, the rural employment guarantee programme, pensions, relief for natural calamities, police, railways, education, petroleum subsidy and capital subsidy for space research. The excess expenditure was estimated at ~70,900 crore.

Add this amount to the revenue shortfall of ~1.85 trillion, you get a total additional burden of ~2.56 trillion. This is equivalent to 1.25 per cent of GDP.

If the government had done nothing, its fiscal deficit would have widened to 4.65 per cent of GDP in 2019-20. Remember that the Budget estimate for fiscal deficit in 2019-20 was 3.3 per cent. But since the economy had slowed considerably, the resultant fiscal deficit had already gone up to 3.4 per cent.

The government in its wisdom decided against allowing the headline fiscal deficit number to be breached by more than 0.5 percentage point to stay within the ambit of the fiscal responsibility law. So, what did it do?

What could have come to its rescue was the ~1.76 trillion of additional money that the Reserve Bank of India (RBI) was required to transfer to the Centre following the acceptance of the recommendations of the Bimal Jalan committee on the central bank’s economic capital framework. But the actual additional financial bonanza for the Centre turned out to be only ~58,000 crore for the current year.

This was because the Budget estimate for 2019-20 had already provided for ~90,000 crore of receipts from the RBI during the year on this account. Another ~28,000 crore had been pocketed in advance by the Centre for meeting its fiscal deficit in 2018-19 and that amount was received as interim dividend last year. The remaining amount of ~58,000 crore was what the Centre could have got this year to boost its receipts.

But there were shortfalls of about ~22,000 crore in dividends from other public sector banks and public sector undertakings. The net additional benefit to the Centre from dividends and profits of RBI and public sector entities was thus only ~36,000 crore.

The extra dividends helped bring down the government’s deficit from ~2.56 trillion to ~2.2 trillion. Another ~35,300 crore was saved on account of reduced interest payment The government also looked at various expenditure heads and succeeded in reducing its expenditure by ~48,000 crore, almost half of which was possible because the government could not spend as much as ~20,630 crore from what was allocated under the Pradhan Mantri Kisan Samman Nidhi. But the gap was now reduced to ~1.37 trillion.

It was then that the government began using the route of extra-budget borrowing. The food subsidy bill was reduced from ~1.84 trillion to ~1.08 trillion, a saving of about ~75,500 crore. This brought down the excess over expenditure to only ~62,000 crore, which was within the safe limit of a 0.5 percentage point slippage over the budgeted fiscal deficit.

But that reduction in food subsidy was not really a reduction. The entire burden of ~75,500 crore was met through loans from the National Small Savings Fund (NSSF). Indeed, the government borrowed a higher amount of ~1.1 trillion from the NSSF. While ~75,500 crore was meant for meeting the current year’s food subsidy bills and the remaining ~34,500 crore was used to settle previous year’s food subsidy bills, which should have reduced the arrears of the Food Corporation of India.

What is, however, more worrying, is that the government intends to borrow ~1.36 trillion from the NSSF in 2020-21 also to meet its food subsidy bill. Surprisingly, the government’s food subsidy bill for next year is only ~1.15 trillion and it is borrowing much more than that from the NSSF.

While for the government’s 2019-20 account, the fiscal deficit has been contained at 3.8 per cent of GDP, what should not be forgotten is that these are all revised estimates. Remember what happened to the revised estimates on revenues and expenditure for 2018-19? They were presented in February 2019 and it became clear by June that year that the provisional actuals were significantly different from what the revised estimates had stated, creating fresh budgeting challenges for the government. Hopefully, by June 2020, nothing similar would take place.