Even while slipping on the fiscal deficit target for FY18, the government has shown its commitment towards fiscal consolidation by budgeting a lower target of 3.3% for FY19. The critical aspect is whether the government will be able to meet this fiscal deficit target. More importantly, if the government has been compromising on the quality of its expenditure to meet the fiscal deficit targets. The Centre has budgeted gross tax revenues of 12.1% of GDP for FY19, which would be a record high for the last two decades. Direct tax collection is budgeted to increase to 6.1% of GDP in FY19, from 5.4-5.6% earlier. A large part of the increase can be attributed to increased surcharge and cess in the last two budgets. The balance improvement can be attributed to improved tax compliance after the anti-evasion measures and greater formalisation of the economy. Indirect tax collection is also increasing sharply from 5.6% of GDP in FY18 to 6% in FY19. However, these numbers also include sizeable collections of compensation cess (`0.9 trillion in FY19). Truly speaking, compensation cess should not have been counted towards the Centre’s revenues—as these collections will be parked in a separate earmarked fund and can be utilised only for compensating the states for shortfall in GST revenues. It has matching entries on the expenditure side. If one strips off the compensation cess, then the indirect tax collection target for FY19 works out to be 5.5% of GDP, which is not materially different from the levels achieved in the past.
Meeting the target of indirect tax collections for FY19 will be heavily contingent upon the stabilisation of GST revenues. The gross monthly collections of GST would have to move into the zone of around Rs 1 trillion—from actual collections of around `0.85 trillion in the recent months, to be able to meet the budgeted target. If GST stabilises by April, this looks achievable. Pressure may, however, build up if compliance takes more time to improve. Another risk is that if oil prices harden, then the government may be forced to roll back some of the petrol and diesel excise hikes (like it did in October 2017) due to popular unrest. On the non-tax revenue front, revenue from the telecom sector (in the form of licence fees and spectrum usage charges) has fallen much short of the target in the last two years. For FY19, the government has budgeted a jump in telecom fees to the government by 58% (to `486 billion), which could be difficult to achieve, given the competitive pressure on telecom sector. As far as disinvestment revenue of `800 billion is considered, its realisation will depend on the state of equity markets—which appears somewhat shaky at present. The government’s revenue generation from tax and non-tax avenues depends on robust economic growth and many other factors that are beyond their control. If the revenue falls short of the target, the government tries to achieve the deficit targets by controlling the expenditure. A big chunk of the expenditure goes into commitments like interest payment and fixed overheads for running various government departments (the expenditure commitment for which cannot be cut during the year). Interest payment accounts for around one fourth of the government’s total expenditure.
Given that the other expenditure heads are sticky, there is a tendency of the government to cut capex in order to meet the fiscal deficit target. We saw that happening in the current fiscal year. In FY18, the government had budgeted for capex growth of 9%. With the lower-than-budgeted revenue collection, the actual capex recorded a fall of 4%. For FY19, the capex is budgeted at 1.6% of GDP, which is low compared to the previous years. Last year, the economy got a big boost from investment by PSUs. Capex by PSUs grew by 20% in FY18 (excluding the Food Corporation of India), against 9% in previous year. For FY19, the PSUs have budgeted for a minuscule capex growth of 0.3%. This makes it even more critical for the government to not miss its capex budget, especially so, when the private capex is in a dismal state. There could be additional pressure on the food subsidy, due to higher MSPs for crops announced in the budget. The main concern is that the quality of the expenditure should not deteriorate, with the reduction in the government capex. Overall, capex (by government and PSUs) as a percentage of GDP is falling to 5.2% in FY19, from 5.6% in the previous year. Meanwhile, there is a pressure on state government finances due to the farm-loan waivers as well as the cuts on the VAT for petrol and diesel by many states. Next year, state finances may face populist pressures in the run-up to the elections. The Centre’s lower fiscal deficit target set for FY19 is achievable, provided the government is able to iron out the GST-related glitches. The expected pick-up in the GDP growth should help in achieving the lower fiscal deficit target. The potential risks on revenue-front relate to oil prices and state of global financial markets. Fortunately, both these risks are unlikely to play out simultaneously, given their typical correlation. On the expenditure side, a fall in capex as percentage of GDP is a cause of concern. It would be critical that the government meets its budgeted capital expenditure target, especially at a time when the private capex is not picking up.
Rajani Sinha & Mangesh Soman
Mumbai based-corporate economists.
Views are personal