The FY18 advance estimates of Gross Value Added (GVA) show slower government (public administration) spends having a moderating effect on growth. While trends in the Centre’s revenue collection over April-November 2017 (FY to Date 18, or FYtD18)—including the five months of GST—are now officially available, there is still significant uncertainty over indirect tax collections (including export tax credits and reconciliation) over the remaining four months, and the consequent implications for the fiscal metrics budgeted for FY18.
The accompanying graphic shows growth in tax collections in FYtD18 relative to both FY17 actuals and FY18 Budget Estimates (BE). Clearly, direct tax collections are falling behind FY18 targets (although news reports on December direct tax collections suggest that the shortfall will be lower). Indirect tax collections are ostensibly doing much better than budgeted, but need to be interpreted cautiously, since these are gross revenues, and include IGST collections, part of which will be shared with states (SGST) and there will also be an amount that is refunded to exporters, and our understanding of their magnitudes is still hazy.
Expenditures, on the other hand, are higher than budgeted, but the reality is that FY18 Budget was tabled a month earlier than usual and consequently, expenditures have been front-loaded relative to FY17—consequently, the fiscal (even more so, the revenue deficit) deficit is sharply higher than usual on a seasonal-adjusted basis. FYtD18 revenue deficit was at a disturbing 153% of FY18 budget (Note that revenue expenditures budgeted at Rs 18.4 trillion, or lakh crore, dwarf capital spends of Rs 3.1 trillion).
The key tax segment in determining the run-rate of revenues will be GST collections, data on which is available from July to November. Although ambiguities remain on issues like export credit refunds and tax-credits claimed pre-GST, the following are some observations. GST payable was fairly high during July-September (above Rs 900 billion per month), but dropped thereafter in October and November, presumably as input tax credits for final sales have begun to be factored in. Actual collections by the Centre, after IGST amounts have been (partially) transferred to states, have also been falling, and it is not clear whether the drop in total collections in November have been partially due to the downwards revised rates post the GST Council meeting. The December collections will provide greater clarity on these issues.
In terms of overall tax and non-tax revenue collections, based on run-rates and seasonality in tax collections (tax collections are usually higher in Q3 and Q4 of a fiscal year), we estimate the Centre might see a revenue shortfall of Rs 1,077 billion (i.e., about 0.65% of FY18 GDP, indicating a worst case slippage of the fiscal deficit to 3.85% of GDP versus the 3.2% budgeted). Note, once again, that reported December direct tax collections can reduce this gap by Rs 50-100 billions. This leads to various options and trade-offs for fiscal stimulus versus prudence in deciding the FY18 Revised Estimate.
The first is to stick to the budgeted fiscal deficit target of 3.2% of GDP. That means a full cut of Rs 1,077 billion in spending and this is an extreme option. We think a feasible cut might be about `800 bn and plug the gap with the higher borrowings. The announced additional market borrowings of Rs 730 billion (minus the `140 billion cancellations) plus an estimated additional collections of small savings deposits (over the budgeted `1 trillion) of `200 billion adds up to additional borrowings of `790 billion and implies a revised fiscal deficit of 3.65%.
Our conjecture, even if a stimulus option is deemed required, is that the FY18 fiscal deficit will not breach 3.5% of GDP. Hence, the second option is to cap the deficit at most to 3.5% and use the surplus borrowings and deposits to build up cash balances which had been drawn down early in FY18, and which might be used for managing borrowings in FY19, even as expenditures increase.
Finally, expenditure management is likely to be the balancing lever to achieve a desirable mix of budget metrics. The accompanying graphic shows spending on revenue and capital heads during April-November 2017 (compared to FY18 budgets). Overall, revenue spends are closer to budget, while capital spends lag. Under revenue spends, transfers to states lag. In short, there is a buffer to absorb a revenue shortfall, but with a potentially moderating effect on GDP growth.
With contributions from Abhay Chavan