That the government would not be able to meet its fiscal deficit target for the current financial year was fairly evident from around November last year. The only issue was how much the slippage would be and what steps would it take to put its finances back on track in the coming financial year.
In the event, finance minister Nirmala Sitharaman invoked the escape clause in the Fiscal Responsibility and Budget Management Act, which allowed a 0.5 percent deviation from the fiscal glide path in the event of slowdown caused by fundamental structural reforms. So the fiscal deficit is 3.8 percent for the current fiscal (instead of 3.3 percent) and 3.5 percent for 2020-21 (when it ought to be 3 percent).
Of course, if the extra budgetary and other resources and financing through loans from the National Small Savings Fund (totalling Rs 1.86 lakh crore) are added, the fiscal deficit touches 4.3 percent for 2020-21 instead of 3.5 percent. These may not be part of the market borrowings of the government currently, but at some point in time, these will come back to bite, since servicing of interest and repayment of these off-Budget borrowings are done through the Consolidated Fund. Also, it will push up overall government debt. One positive aspect is that at least these are stated upfront and not just hidden among Budget numbers.
But even if we go along with the 3.5 percent number, can this be achieved? As of now, that is not very clear.
The fiscal deficit is basically the excess of expenditure over receipts and the deficit number indicates how much the government is going to borrow to fund the former. It can be contained if revenues are extremely buoyant or expenditure is contained. What do the revenue projections show?
The Centre’s gross tax revenue in 2020-21 is projected to grow 11.9 percent over the revised estimates of the current fiscal. Direct taxes account for over 54 percent of these revenues. Nominal growth of the economy is estimated at 10 percent. Is a nearly 12 percent growth in taxes realistic? Similarly, collections under the goods and services tax (GST) are set to grow 12.7 percent. Even if we accept that the economy has bottomed out, can such a projection be realistic?
Why we need to take these projections with a hefty pinch of salt is the gap between projections and actual performance. In 2018-19, gross tax revenue was estimated at Rs 22.7 lakh crore; the actual collections were Rs 20.8 lakh crore – 9 percent less. The shortfall increased to 13.8 percent in 2019-20 - the Budget estimated gross tax revenue at Rs 24.6 lakh crore; the revised estimates put it at Rs 21.6 lakh crore. A big chunk of this could be due to the corporate tax rate reductions of September– corporate tax collections were 20 percent lower than Budget estimates. But collections under personal income tax, customs and GST also fell short of Budget estimates. We will have to wait till next year’s Budget to see what the actual collections were.
The estimates on non tax and capital receipts may also be a tad optimistic.
Non tax revenues are estimated to grow 11 percent. A big chunk is receipts from telecom–set to grow 2.25 times from Rs 58,989 crore in 2019-20 to Rs 1.33 lakh crore in 2020-21. Some of this could be from the statutory dues that telecom companies have to pay, having lost the case in the Supreme Court and some from the sale of 5G spectrum. The first is going to put the already ailing telecom industry in deep crisis and this could affect corporate tax collections. But if the government comes out with some relief, then non tax collections could take a hit. Also, given the state of the industry, it is not clear if 5G auctions will be successful at all–remember these auctions were supposed to be done in the second half of 2019.
What the government will probably resort to is lean on public sector companies and financial institutions to pay it higher dividends. But that will happen only if they have surpluses. Even if they do, giving up a large share to the government will mean they will have that much less for their own capital expenditure (some of which could pep up the economy).
There’s a big question mark over the disinvestment receipts, set to almost double from Rs 65,000 crore to Rs 1.2 lakh crore. Three-fourths of this is to come from the sale of government stake in the Life Insurance Corporation and IDBI through IPOs. But it is only the listing that will decide the valuation. Can IDBI get the kind of valuation the government is expecting? Will the stock market have the appetite for this?
There’s not much clarity on where the rest of the Rs 30,000 crore is going to come from, but a number of public sector companies have been identified for strategic sale. It is not clear if they will happen or how much they will fetch. Barring 2017-18 and 2018-19, disinvestment receipts have always been less than projected.
It can be argued that a higher fiscal deficit can be tolerated if the quality of spending is good. That is, if money is spent more on creating assets than on running expenses. The Budget estimates show a marginal increase in the share of capital expenditure in total expenditure in 2020-21–13.5 percent against 12.9 percent in the revised estimates of 2019-20. The budgeted growth in capital expenditure (18 percent) is also higher than the 11 percent growth in revenue expenditure.
But that should not divert attention from a worrying indicator–the revenue deficit is estimated at 76.5 percent of the fiscal deficit. This clearly shows that much of the borrowing is going to finance non-productive spending. Interest payment and subsidies are together gobbling up 57 percent of the tax revenues that come in. The outgo on subsidies could be higher but for the fact that borrowings of the Food Corporation of India and payments to oil companies are not accounted for in the budgeted numbers.
This is simply no way to perk up the economy. And it certainly isn’t responsible fiscal consolidation.
(The writer is a senior journalist and author. She tweets at @soorpanakha)
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Updated Date: Feb 02, 2020 16:46:47 IST