How govt can prevent big fiscal slippage even if tax collection is low, expenditure is high

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Published: January 9, 2020 12:56:45 PM

The growth rate of net taxes on products has been lowered from 8.8 per cent in FY19 to a mere 5.8 per cent in the current year.

fiscal deficit, revenue target, tax revenue, non-tax revenue, economic crisis, gdp growth, shaktikanta das, government's fiscal deficitPer capita private final consumption expenditure (PFCE) growth rate has been revised down from 6.8 per cent to 5.1 per cent.

While the fiscal deficit of India has already widened substantially by now, the government has cut expectations on tax collections for the entire year. Lower tax collections estimate creates a fear of high fiscal deficit slippage by the end of the current fiscal. The growth rate of net taxes on products has been lowered from 8.8 per cent in FY19 to a mere 5.8 per cent in the current year, according to the first advance estimates of national income, released by the Ministry of Statistics and Programme Implementation.

During April-November, the country’s fiscal deficit reached Rs 8.08 lakh crore, which was Rs 7.17 lakh crore in the same period a year ago. This is in itself a problem that gets worse after being coupled with the recently released pessimistic macroeconomic estimates.

Also Read: Manufacturing, construction to take down economy this year; govt estimates show major fall in growth

The government has also cut estimates on consumption expenditure, which is a major source of indirect tax. Per capita private final consumption expenditure (PFCE) growth rate has been revised down from 6.8 per cent to 5.1 per cent. Per capita PFCE is the expenditure incurred on the final consumption of goods and services by the resident households and non-profit institutions serving households and thus its fall pulls down the tax collections, shooting up the fiscal deficit target of 3.3 per cent. 

“The fiscal deficit may most likely slip to 3.8 – 4 per cent in the current fiscal year as the government has itself said that there will be a revenue shortfall due to cut in corporate tax” Madan Sabnavis, Chief Economist, Care Ratings, told Financial Express Online. To keep fiscal deficit on the track, the government may go for a major cut in expenditure in the remaining part of the year, he added.   

Also Read: Has India’s economic slowdown bottomed out? Early indicators suggest green shoots of economic revival

In the last month, RBI governor Shaktikanta Das told Financial Express that economic conditions were appropriate for the government to invoke the clause that allows it to widen the deficit. Meanwhile, considering last year’s incident when the government folded the slipping fiscal deficit at the end of the year, economists believe that the government may have the same plan this year as well. 

“Fiscal deficit may marginally slip to 3.5 – 3.6 per cent, however, the government may surprise us by maintaining it around 3.4 per cent, Sameer Narang,” Chief Economist, Bank of Baroda, told Financial Express Online. Even in the last year, the government succeeded in keeping the fiscal deficit in the range, and this year as well, I think the government would not let it slip by a bigger margin, he added.  

There are multiple ways by which the government can improve the fiscal deficit figures in the last quarter, however, implementing such steps will not be easy, provided the economic crisis in the country. For instance, if the government cuts down expenditure, it would adversely affect the GDP growth of the quarter.  

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