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  1. Absence of true fiscal fundamentals

Absence of true fiscal fundamentals

At a minimum, the consolidated Centre-plus-state deficit for FY18 would be about 0.5% of GDP less than now assumed by the rating agencies, and other experts.

By: | New Delhi | Published: August 4, 2018 2:07 AM
There is either a rumour, or false news, going around, and on a subject on which there should be no ambiguity—the magnitude of GST revenues over the last few months (and, since inception).

There is either a rumour, or false news, going around, and on a subject on which there should be no ambiguity—the magnitude of GST revenues over the last few months (and, since inception). This is an election year, and, unfortunately, every statistic gets blown out of proportion. Of course, we should also mention that this is the age, not of Aquarius, but Twitter and Cambridge Analytica—that is a deadly combination in the best of times. Now, you add election-year politics and you have a super-deadly concoction of false news.

The prevailing “conventional” wisdom is that the average three-month GST collection of Rs 95,000 crore for the first three months of this fiscal year—April through to June—is way below the Union budget target of 112,000 crore a month. We also know that the GST council has reduced tax rates on a very large set of items. There is now official talk of eliminating the 28 % tax bracket for all but a few sinful items. The immediate response of the GST pessimists (co-incident with the political opposition?) is that this is an election jumla by the BJP to win votes from the middle class (the presumption is that these middle-class votes “rightfully” belong to the opposition).

Two finance ministers—of Punjab and Kerala—are on record as having “opposed” the middle-class GST tax cuts. Neither have a BJP chief minister and Mamata Banerjee been uncharacteristically quiet. Nevertheless, the argument that GST is missing the annual budget target of Rs 112,000 crore by about Rs 17,000 crore, each month, lends some heavy “intellectual” weight to the arguments of the opposition. Then, there was the following headline in a pink newspaper about GST revenues being short of the budget. “GST revenue shortfall: The Centre could be staring at a Rs 517 billion hole”, proclaimed one.

Finance minister, Arun Jaitley, believes that these tax cuts would lead to a loss of Rs 70,000 crore in this fiscal year. This seems close to the pink headline estimate of Rs 52,000 crore, the other Rs 18,000 presumably being lost on the state account. However, Mr. Jaitley’s estimate is notional, while the pink newspaper (and the opposition) believes it is the reality.

Then, there are the consequences of tax revenue loss. This is election year, and starting from the MPC, to the rating agencies, to the newspapers, to the political opposition, to Twitter and finally to aamaurat—all are concerned about the impact that fiscal slippage will have on the deficit, and interest rates and EMIs i.e., it is imperative that we obtain the right calculation of GST revenues relative to the budgeted amount. The nation wants to know, we all want to know.

The strikingly good news is that, despite the tax cuts, GST tax revenues are very much on track and that, instead of a deficit, the nation is looking at saving, at a minimum, all of the compensation cess budgeted. At least Rs 90,000 crore, or 0.5 % of GDP, will accrue to the consolidated state-plus-Centre account. The combined fiscal deficit of the Centre and states for FY19 is 5.9 % of GDP: 3.3 % at the center and 2.6 % for the states. A saving of 0.5 % of GDP would imply a combined deficit of 5.4 % of GDP. The lowest combined deficit recorded (IMF data), ever, was the 5 % achieved in the bumper pre-crisis year of 2007/8. Further, the last three fiscal years (2016/17, 2017/18 and 2018/19) have been the lowest (after 2007). And the lowest among these will happen in a national election year!

But, this is getting ahead of the story. We need to establish the veracity of this conclusion, which will mean establishing the fake news in the media. This will involve some numbers and simple accounting—only the interested reader (and accountants) should proceed beyond this point!

First, the genesis of the Rs 112,000 crore a month target. The Union budget states the following GST revenues for FY19: (Centre) CGST, Rs 604,000 crore; (Integrated) IGST, 50,000 crore; cess Rs 90,000 crore. Making the common (but wrong) assumption that GST collected at the state level, SGST, is equal to CGST, one arrives at the following estimate of GST calculations for FY19: Total is equal to CGST*2 + IGST + cess, or Rs 1,348 thousand crore. For 12 months, that is an average of Rs 112,300 crore.

There are two terrible mistakes in this calculation—first, SGST has not been equal to CGST for any month to date. At some future date, once the dust settles, they will be equal, but not now. An estimate of SGST for FY19 is provided by the RBI in its study of state finances—Rs 488,000 crore. The second “error”—and both the MoF and the RBI share blame for not highlighting this—is that the FY19 estimate, only for GST, is based on revenue collection for 13 months! Think about it—the GST revenue estimate for FY18 was for eight months. If FY19 is for 12 months, then where does the April 2018 GST revenue of Rs 103,000 crore go?

Now, let us do the calculations of FY19 GST revenues on a 13-month basis. Total collection is Rs 1,232 thousand crore, estimated as: CGST Rs 604,000 crore + SGST Rs 488,000 crore + IGST Rs 50,000 crore + cess Rs 90,000 crore. This, divided by 13, yields an average estimate of Rs 94,800 crore a month. Average per month collection from April-June 2018 is Rs 95,400 crore.

Remember the controversy that erupted after the Union budget was presented on February 1? Many experts (especially politicians!) had estimated that the BJP had presented an election year budget, with the added refrain that there was no difference between the UPA and NDA except the presence of a cow. By making this comparison, we have, on record, that the UPA stalwarts at least admit to the possibility that the Congress-led UPA was fiscally irresponsible.

Remember the brouhaha over the Centre not achieving the stated fiscal target of 3.3 %, and reporting an excessive 3.5 %?  Bond yields rose, the government had to pay more for its borrowing, and fiscal and monetary experts pronounced the death of fiscal responsibility. The MPC warned of fiscal slippages being inflationary. None of the experts bothered to point out, let alone emphasise, that the slippage in the fiscal deficit was due to the technicality of an eight rather than nine-month GST estimate. CEA Arvind Subramaniam recently stated that only Rs 5,000 crore of the Rs 61,000 crore, budgeted in FY18, cess was actually used. When the dust settles, the actual fiscal deficit at the Centre will be less than the original 3.3 % budgeted for FY18. At a minimum, the consolidated Centre-plus-state deficit for FY18 would be about 0.5% of GDP less than now assumed by the rating agencies, and other experts.

Even with zero acceleration in revenue growth, the cess of Rs 90,000 crore will be saved in FY19. For the first two months, April and May 2018, a total of only Rs 4,000 crore compensation cess was distributed, and this should go down to zero pretty soon. What all this means is that more GST tax cuts will be forthcoming—indeed, should be forthcoming.

What the “excess” GST revenue in FY19 (and some from FY18) means is that some money is available for some additional expenditures by the Centre and/or state governments—money towards MSP increases, and money towards the beginning of health care for the poor. And without causing a flutter among fiscal fundamentalists, of which India seems to have more than its fair share.

The author is Senior India analyst at Observatory Group, a New York-based macro policy advisory group, and part time member of the PM’s Economic Advisory Council

Views are personal. Surjit tweets @surjitbhalla

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