The Union government may fail to meet its fiscal deficit target in the current financial year. That, however, is not the real concern. You could trust the ingenuity of the finance ministry mandarins to finally present a fiscal deficit figure for 2017-18 that will not be much higher than the target of 3.2% of gross domestic product.
Some expenditure (read dues to public sector bodies like the Food Corporation of India) will be deferred, disinvestment, including the merger of oil companies, should get a last-minute big push, and state-owned companies may be asked to declare special dividends allowing them to transfer a part of their reserves to reflect in the government’s non-debt capital receipts.
Also coming to the rescue of the finance ministry will be the many central ministries, including defence, whose absorptive capacity to spend the money allocated to them continues to remain poor and the unspent money will return to the exchequer, helping the government rein in the deficit.
And, finally, a definitional tweak may be introduced to allow bank recapitalisation to be treated in a manner that it does not widen the government’s fiscal deficit.
So, after weeks of stress and tension over a widening deficit, you could see the government claiming on February 1 a significantly reduced slippage in its fiscal deficit. It may thus assure investors, credit rating agencies and its critics that the government is after all committed broadly and in principle to fiscal prudence.
More importantly, the government will convey to all that it is doing its best to keep the deficit under check even during a year of huge revenue disruption caused by the roll-out of the goods and services tax.
The real concerns, however, will remain. And these will be the underlying revenue trends, an overall trajectory of widening deficits of the Centre as well as states and the dangers of a worsening quality of expenditure.
Budget estimates go awry
Data for the first eight months of 2017-18 shows that the government’s revenue deficit has widened at an alarming pace. Revenue deficit is the gap between the government’s revenue expenditure and revenue receipts. While revenue expenditure increased in April-November 2017 by over 13% over the same period of 2016, the government’s revenue receipts increased by less than 2%.
These numbers have played havoc with the Union Budget’s deficit numbers. The Union Budget had targeted only 6% growth in revenue expenditure and a slightly higher 6.5% growth in revenue receipts. Instead, revenue expenditure growth has already doubled and the revenue receipts growth has tumbled to a third of the target.
It is clear that the problem this year has been caused by the revenue side of the Budget.
Was it a mistake to project 13% growth in tax revenues for the full year when the finance ministry knew that the GST would be rolled out during the year?
Was the government overambitious in projecting an increase of 14% in non-tax revenue in the current year?
And what gave it the confidence that it would be able to rein in its revenue expenditure growth to only 6%, when the growth under this head in 2016-17 was about 13%?
In retrospect, both estimation and action to achieve the targets based on that estimation seem to have been flawed.
Follow the revenue
The poor growth in revenue receipts is directly attributable to a 40% drop in non-tax revenues largely on account of reduced transfers of surplus and profits of public sector undertakings and the Reserve Bank of India. Hence, pressure is now building on the PSUs and the RBI to cough up more to bail out the Union government.
The growth in revenue expenditure was a little less than the 13% in the first eight months of the financial year. But rising oil prices have put paid to such hopes. In spite of a decline in urea subsidies, the government’s subsidy bill on petroleum products has shot up by 30%.
Major subsidies at Rs 2.4 trillion account for a small portion of the total revenue expenditure of about Rs 18 trillion. So, a rise in the subsidy bill alone is not responsible for the slippage.
It is clear that during the year the Union government has overspent on the revenue side even though its revenue receipts have not kept pace with the target. The net result is that its revenue deficit by the end of November 2017 was over 152% of the year-end projection. In other words, the revenue deficit figure had gone up to Rs 4.89 trillion, up 40.5% over the Rs 3.48 trillion of revenue deficit estimated in the same time of last year.
If no corrections are applied, the revenue deficit for the full year might well be around 2.9% of GDP, one percentage point higher than the Budget target and higher than even the 2.1% figure for 2016-17. Widening fiscal deficit is a concern. But a revenue deficit that is widening because of rising expenditure and falling revenues can be more troubling.
A consolidated problem
The implications for the consolidated fiscal deficit for the whole of India, including the Centre and states, will be more serious.
Already, independent estimates made by analysts have put the combined fiscal deficit of all the state governments at 3% of GDP, compared to the budgeted figure of 2.7% for 2017-18. Even if the Centre manages to rein in its fiscal deficit to 3.5%, the current year’s consolidated deficit is set to cross the 6.5% mark.
The best consolidated fiscal deficit for India in the last decade was 4% of GDP in 2007-08. Since then, it has never stayed below 6%. The performance of the current year will give no hope of an improvement on this front, either.
Worsening expenditure quality
Finally, there is a danger to the quality of expenditure if the government fails to bring down its growth in revenue expenditure from the current estimate of about 13%. The share of capital expenditure as a per cent of GDP has stayed below 2% for the past five years. With revenue expenditure growing faster than projected, there is a danger of that ratio getting worse.
With oil prices rising and the government likely to be reluctant to spend its political capital on allowing a corresponding rise in petroleum product prices, there is little hope of the subsidy bill declining in the current or the coming year. And electoral concerns (there are more than a dozen state elections in the next year or so) weighing heavily on the government and the pressure of addressing farmers’ distress mounting, it is reasonable to expect higher revenue expenditure.
The only silver lining is perhaps in the composition of the government’s tax revenues. With income-tax revenue maintaining higher growth than that of indirect taxes, whose collections because of the GST will take at least a temporary hit, the revenue from direct taxes as a per cent of GDP is set to increase its lead over the corresponding share of indirect taxes. Tax experts should hail this even in an otherwise gloomy fiscal scenario.
This article first appeared on The Business Standard.