FISCAL SITUATION WORSENS

Fiscal deficit reached 103.9% of the Budget estimate at the end of October

would be repeated got dashed as October collections again fell below ` 1,00,000 crore. “The lower than expected GST collections provide little elbow room for further rate reduction in the current fiscal considering the need to stick to the fiscal deficit targets,” says M. S. Mani, Partner, Deloitte India

“We don’t really know how GST is doing. Sometimes people talk about ` 1 trillion (monthly collections), sometimes for months it is below ` 1 trillion,” says Montek Singh Ahluwalia, former Deputy Chairman of the Planning Commission.

However, some people, including those in the government, are hoping the tax collection target will be achieved due to buoyancy in direct tax collections. “If you look at the last five- six years, direct tax collections stood out in 2017/18. May be this year also they can stand out as (GDP) growth will be higher,” says D.K. Joshi, Chief Economist at ratings agency CRISIL. In 2017/18, direct tax collections had grown 18 per cent. This year, they have risen 16.9 per cent, in line with the budgeted 17.4 per cent.

Surabhi Ahluwalia, official spokesperson of the Central Board of Direct Taxes, says direct tax collections have been in line with expectations and there are no reasons to believe the government will not be able to meet the targets.

“Formal deficit targets are likely to be met. There may be an increase in carryover of unpaid bills for the new health insurance scheme, Ayushman Bharat.” ARVIND VIRMANI Former Chief Economic Advisor and Executive Director, IMF

DIVIDENDS & DISINVESTMENT

Other income such as dividend/profit from PSUs, CPSEs and RBI as well as disinvestment proceeds account for almost 20 per cent government earnings in this year’s Budget. Can the government earn more under these heads? A look at government accounts suggests it is already milking these cash cows more than in the previous year.

Out of the Budget estimate of ` 1.07 lakh crore from dividends and profits, the government had already received ` 49,368 crore, or 46 per cent, till September. In the corresponding period last year, it had received only 30 per cent of the targeted amount by October.

The scope for getting more from these sources is limited. Aditi Nayar, Principal Economist, ICRA, explains why. “In August 2018, the RBI’s Central Board approved the transfer of surplus of ` 50,000 crore to the government for year ended June 30, 2018. However, the RBI’s Annual Report indicated the government would receive ` 40,000 crore surplus from the RBI as it had transferred ` 10,000 crore as interim dividend in March 2018, which was included in the provisional data for 2017/18,” says Nayar. This means dividend from nationalised banks and financial institutions and non-financial PSUs will have to rise considerably to ` 67,310 crore in 2018/19 from an estimated ` 50,710 crore in the previous year, which may be a challenging task, she adds.

The government is also far from achieving the disinvestment target of ` 80,000 crore. It has so far raised only ` 10,101 cocre, though it recently sold its stake in REC to PFC from which it expects to raise ` 11,000 crore. It is now looking at avenues such as buyback of PSU shares and share sale in some more PSUs. Recently, it sold a 3 per cent stake in Coal India Ltd. through an offer for sale. It is likely to garner ` 5,000 crore through this. It expects to fetch an additional ` 10,000-12,000 crore through share buyback by oil PSUs. It has also announced sale of its 100 per cent stake in Dredging Corporation of India Ltd. for a likely sum of ` 700 crore. It may also go ahead with sale of ‘enemy shares’ which are lying with the Custodian of Enemy Property of India under the Ministry of Home Affairs. It hopes to get around ` 3,000 crore through this. But these last-ditch efforts would garner only ` 20,000-25,000 crore, way behind the ` 70,000 crore needed to meet the targets.

However, Anis Chakravarty, Lead Economist and Partner, Deloitte India, says the government may manage to get some deals through in the last quarter to improve disinvestment collections. “If you look at the past couple of years, a bulk of asset sales take place in February. In that sense, we can say there’s still some time,” he says.

EXPENDITURE CUT THE ONLY OPTION?

While revenue targets are looking far from achievable, the expenditure will most likely overshoot the Budget target. The rise in crude oil prices and depreciation of the rupee have not helped the government’s cause. The reason is simple. The budgetary allocation for petroleum subsidies is ` 24,900 crore. Crude oil prices rose from $65 a barrel (Indian Basket) in February 2018 to a peak of $85 in October and are now close to $60. The government had assumed $57.50 a barrel as the average price for Budget calculations. The rise in crude oil prices will not only increase petroleum subsidy but also fertilizer subsidy.

Add to this the additional cost of higher minimum support prices for various crops and the government’s ambitious health insurance scheme and it becomes clear that government spending will not stay within the budgeted limit unless the government decides to go for expenditure cuts. D.K. Joshi of Crisil says in a situation like this, the axe falls first on capital expenditure. Capital expenditure is targeted to rise 16 per cent over last year’s revised estimates.

Or, the government could carry forward some of the expenses next year to stick to the fiscal deficit target of 3.3 per cent. “Formal deficit targets are likely to be met. There may be an increase in carryover of unpaid bills for the new health insurance scheme, Ayushman Bharat,” says Arvind Virmani, former Chief Economic Advisor, Government of India and former Executive Director, IMF. The government has already kept lot of expenses off the balance sheet by financing some of the expenses through what is called as extra budgetary allocations. It has accounted for spendings of ` 4.78 lakh crore through such means. The government raises these resources by asking CPSEs to issue it fully-serviced bonds. These bonds would, however, be exclusively used by the ministry concerned on infrastructure projects or other government schemes. For example, in August, the cabinet gave nod for raising ` 15,000 crore through NABARD for the Swachh Bharat Mission (Rural) and gram panchayats for Solid and Liquid Waste Management.

Sudipto Mundle, Emeritus Professor and Member of the Board of Governors of National Institute of Public Finance and Policy, says there are many things the government can do to make it appear that it has met the target even if it has not. “Whether they slip or meet the target is to me not analytically very significant. We won’t know till the last minute and all these adjustments will be done. It is the optics that matter. They are bound to try to do that.”

But will that mean delaying the inevitable — a bloated fiscal deficit — to next year? “Meeting a fiscal deficit target today isn’t great if you have made commitments that will knock the target into cocked hat in the next two or three years. So, if you have announced two or three programmes that need a huge amount of money that is not provided for (now), in the next couple of years, the fiscal deficit will shoot up to hell or you will raise money through additional taxation or you will cut some programmes,” says Montek Singh Ahluwalia. In an election year, a spending cut may not be the right prescription for the government.

This brings us to the question if the government was correct in demanding ` 3.6 lakh crore from RBI’s reserves. Arvind Subramaniam, the former Chief Economic Advisor to the government who had floated this idea in last year’s Economic Survey, says excess capital can be used in several good ways — for recapitalising banks and extinguishing debt to demonstrate the government is serious about a strong public sector fiscal position. Virmani says any “intention to convert legacy accumulated reserves into dividends for use for current expenditures will be gross fiscal irresponsibility”. However, he believes that the use of excess reserves to write off past loans from the RBI to the government will clean up the balance sheets of the RBI and the government.

The government clearly has limited ways to boost revenue, leaving it with only the option either of accounting jugglery to meet the 3.3 per cent fiscal deficit target or biting the bullet and letting the fiscal deficit slip by 10-20 basis points.

“We don’t really know how GST is doing. Sometimes people talk about ` 1 trillion ( monthly collections), sometimes for months it is below ` 1 trillion.” MONTEK SINGH AHLUWALIA Former Deputy Chairman, Planning Commission of India