Shortly after Finance Minister Arun Jaitley announced the Budget on February 1, several economists and analysts noted that it was optimistic of the government to estimate that it would collect Rs 7.44 lakh crore from the Goods and Services Tax next year. Brokerage and investment firm CLSA, for instance, sent to its clients a note warning that GST collections in 2018-’19 could be Rs 1 lakh crore short of the government’s target.

As economists examined the fine print of the Budget, more concerns arose. As the first article in this series noted, Jaitley took advantage of the somewhat-chaotic implementation of the Goods and Services Tax regime and used inventive accounting policies to show an extra Rs 1.07 lakh crore in the Centre’s kitty. The government also burnished its finances by keeping two other large expenditures off its Budget sheets.

This brighter-than-warranted balance sheet has caused some consternation. If tax collections fall short, the fiscal deficit – the gap between the government’s revenues and its expenditures – will widen next year as well. This year, the government had initially targeted a fiscal deficit of 3.2% of India’s Gross Domestic Product but revised it to 3.55% for 2017-’18. This Rs 48,318 crore-gap has to be financed by more borrowings than planned. If this happens again next year, it could result in higher interest rates, making it more expensive for private entities to take loans and increase the cost of investments.

“Finance ministers in the past have been artful in getting the Budgets to fit the projected fiscal deficit target,” said an economist with a global bank, who asked not to be identified. “But this year the Budget has a little more art and a little less science. It is not good for trust to be shaken to this extent in the Budget-making process.”

The intense focus this year on the robustness of government projections for revenue collections is linked to the anxieties of analysts and markets that the fiscal deficit could widen next financial year from the target of 3.3% of GDP as the Bharatiya Janata Party prepares for the 2019 general elections. It will be tempted to spend more on populist schemes to attract voters, analysts fear, but find itself unable to be strict enough to collect the level of taxes from businesses that it estimates in the Budget. spoke to 11 economists and analysts about the government’s revenue projections. All but one had varying degrees of concerns about the numbers. Three work for the government, four in government-affiliated research centres and the others in banks or brokerage firms that advise industry. None of them wanted to be quoted on record.

Complex credit system

Among the causes for the confusion about GST estimates, said the chief economist of a top foreign bank, is “the complicated tax-rebate arithmetic and the lag between paying taxes and receiving rebates”.

This was a reference to the complex GST system, which requires tax to be paid only on the value added to a product during each stage of manufacturing, not on its total value. After this, a company can claim an input credit – a reduction in the tax paid on the output, equivalent to the tax paid by previous rungs in the value chain. But this has proved difficult to implement. Refunds have been delayed to those who have paid excess tax – particularly exporters.

In the first year of implementing GST, between August and December 2017, the government collected Rs 1.10 lakh crore of Central GST, data from the Controller General of Accounts shows. Central GST is the component of the tax that the Union government gets to keep and spend. The Budget projects that by March 2017, this figure will be Rs 2.22 lakh crore. (The other components of GST – State GST, Integrated GST and GST cess – either go entirely to the states or are divided between the states and Centre.)

The target of Rs 2.22 lakh crore set for Central GST requires the average monthly collection from Central GST to be Rs 37,300 crores, even though the average month collection in August-December 2017 was Rs 21,900 crore.

The challenge of achieving the targets is even tougher for 2018-’19. The brokerage firm CLSA said the government’s expectation that Central GST collections will rise by 35% next year over current year is unrealistic. The real increase will be in the 15%-20% range, the firm estimated, implying a shortfall of Rs 65,00 crores-Rs 90,000 crore. If all the four GST components are included, the gap would be about Rs 1 lakh crore, it said.

However, one senior economist who advises the government suggested that there was no reason to be overly concerned about GST numbers because the tax system, introduced in July, was relatively new. “You should not look at the numbers for just one particular tax,” he said. “If the overall tax revenue number projections are reasonable then it is fine by me.”

Other analysts suggest the government might just be able to reach its target if the delays in the refunds and other compliance issues, such as patchy invoice matching and audits are brought to quick resolution. But even after factoring this into the projections, several critics are unsure.

Government’s defence

When the Budget was presented on Feburary 1, finance ministry officials tried to play down concerns raised by journalists and others about ambitious GST collection targets.

“I am absolutely confident about the revenue projected for next year,” Vanaja Sarna, chairperson for the Central Board of Excise and Customs, which oversees the GST collections, told journalists. “I am happy to see the number for December which has gone up to about Rs 88,000 crore. We have had a dip and we have come back. The next two months are going to create buoyancy.”

On the face of it that sounds reasonable. If the Union government had collected Rs 88,000 crore in just the month of December, it could surely collect Rs 1.1 lakh crore in three remaining months of the financial year.

However, Sarna was citing the number for the total GST collection, which includes amounts that the states get to keep as State GST and also the revenues that the Union government get to keep as Central GST. The projections in Union government’s Budget, though, are only for Central GST.

According to the Controller General of Accounts, the Union government collected only Rs 24,215 crore as Central GST in December. This will be supplemented by about Rs 8,500 crore that it will get from Integrated GST, which is paid on goods sold between two or more states and shared with the Centre.

Other concerns

It isn’t just optimistic GST projections that analysts are worried about. As previously reported, the finance minister used creative accounting in reporting GST earnings to brighten Budget revenues.

To add to it, two large expenditures were kept off the Budget sheets to present a healthier account of the Centre’s finances. First, its expense sheets did not show the infusion of Rs 80,000 crore capital into public sector banks through recapitalisation bonds, something the government’s economic survey did not appreciate. In addition, the finance ministry continued to keep the dues of the Food Corporation of India worth Rs 81,000 crore off its expense sheet by getting the National Small Savings Fund to provide an advance to the organisation to meet its expenses. These omissions helped the government reduce the fiscal deficit by another Rs 1.61 lakh crore.

Fiscal slippage

The fiscal deficit number was also helped by a change in accounting policy with regard to the GDP number used to make the calculation. Till two years ago, the estimate of GDP put out by the government’s Central Statistics Office was used to calculate the revised fiscal deficit. Since last year though, that practice has changed. The government now makes its own estimate over the previous year’s GDP number. In the Budget this year, the government estimated the GDP for 2017-’18 to be Rs 1,67,84,679 crore – Rs 1,57,094 crore more than the Central Statistics Office estimated. Had the government stuck to the Central Statistics Office estimate of GDP, the fiscal deficit for 2017-’18 would have been 3.58% instead of 3.55%.

Rathin Roy, director of the National Institute of Public Finance and Policy, believes that the slippage in the fiscal deficit target for the year from 3.2% of GDP to 3.5% was a result of the lack of adequate income from non-tax revenues, such as dividends from the Reserve Bank of India. In a public lecture on February 10 in Delhi, he noted the concern many economists have had: that instead of setting a more reasonable target in the Budget for fiscal deficit to begin with, the government should not set unrealistic targets that will then slip.