Taxes won’t grow anywhere near the target, so govt investment will slow; in which case, where will higher GDP come from?
Given how so much official data, including even budget numbers, lack credibility, the best thing finance minister Nirmala Sitharaman can do is to shrink its size relative to what the FY20 interim budget had projected. If she doesn’t, she too will have to fudge the budget numbers; as FE reported, as compared to the 3.4% of GDP reported, the real fiscal deficit for FY19 was 4.1%.
While the size of the budget was projected at `27.8 lakh crore in the FY20 interim budget, the government can’t possibly achieve the tax targets implicit in this. Indeed, since the government has, in the past, tried to compensate for the slump in private investment by increasing capex on roads and railways, primarily, the tax problem means the government can’t possibly fund even its modest capex plans either, and that will result in a further slowing of GDP in FY20.
The FY19 tax projections of `22.7 lakh crore were high, but there was some basis for the 18% growth as there was still a possible demonetisation dividend—`1.75 lakh crore of deposits were said to be suspicious as they didn’t match the income profile of those putting the money in the bank—and, with GST expected to stabilise, it was expected that people would have no option but to declare their real business turnover and, as a result, would also declare higher personal income tax returns.
As it turned out, the FY17 demonetisation bump—when total tax collections rose 18%—soon dissipated. So, as compared to the `22.7 lakh crore tax target for FY19, the government achieved just around `20.8 lakh crore, making the actual tax growth in FY19 a mere 8% as compared to the 18% target. Much of the shortfall took place in GST revenues; these were projected to be `1 lakh crore short when the interim budget was presented, and even this turned out to be optimistic; the final shortfall on account of the central government GST alone was `1.6 lakh crore.
Given the FY19 collapse, the FY20 tax targets are unachievable. When the interim budget was presented, the FY20 numbers meant a 13% growth; this was high given a GDP growth projection of 11.5%, but it was still doable. Now, however, the FY20 target implies a tax growth of a whopping 23% or around three times the FY19 growth. What makes it likely that FY20 will also see large shortfalls is that, with the economy still sluggish, both corporate and personal income taxes are unlikely to grow very fast—in FY20, personal income taxes are projected to grow 34% as compared to FY19’s 10%. And in the first two months of the year, GST collections are already short by around `8,000 crore per month.
Even if FY20 collections fall short by `1.6-1.8 lakh crore, finance minister Sitharaman can, it is true, still find ways to bridge the gap. There can be a step up in disinvestment receipts from the `80,000 crore target if the government decides to go in for aggressive privatisation; on the other hand, if it decides to go in for the PSU-buying-PSU shares that it relied on in the past, there may even be a shortfall here since PSU balance sheets are a lot weaker, having surrendered so much money to the government over the last two years.
Another possible source of funds is the `1-2 lakh crore of ‘excess’ reserves from RBI; while it is expected the Bimal Jalan panel will recommend cutting RBI’s reserves by this amount, it is risky to base the budget on this assumption. After all, some of its members like former RBI deputy governor Rakesh Mohan have opposed this in the past. And even if Jalan does recommend this be given to the Centre, it is unlikely it will allow this to be used for anything other than PSU bank recapitalisation; so it won’t help defray the general fiscal deficit.
A third possibility is to sell the government’s excess food stocks, and that can fetch `1 lakh crore. Indeed, the government can reduce costs by another `50,000 crore or so a year if, while keeping the ration entitlements the same as under the food security Act—two-thirds of Indians get 5 kg of wheat/rice per month at a highly subsidised rate of `2-3 per kg—it gives this in cash instead of physical rations. While 80 crore persons getting a cash subsidy of `25 per kg—that’s the price difference between the market and ration shops —will cost `1.2 lakh crore, the government spends `1.7-1.8 lakh crore on food subsidies using primarily Food Corporation of India (FCI).
But this requires a complete rethink of the policy towards agriculture and FCI; while this is a theoretical possibility, the government hasn’t moved in this direction in the last five years. Even while proposing the initial `75,000 crore of cash transfers to farmers under PM Kisan scheme, and increasing this by `12,000 crore last week, the government never said it planned to trim or do away with the `1.9 lakh crore of other agriculture subsidies given by the centre/states today.
If Sitharaman doesn’t cut the size of the budget, then she too will have to resort to getting other government departments to fund it. When tax growth collapsed in FY19, the government had no option but to slash its expenditure in order to maintain the fiction of the fiscal deficit remaining broadly under control; if the deficit was patently out of control, GSec yields would have risen further and hit private investment even more.
The lion’s share of the expenditure cut of `1.5 lakh crore was made in food subsidies (`69,000 crore), but this wasn’t done by actually cutting subsidies, it was just done by putting this expenditure on FCI’s books; the transaction will be reversed later. It would be a pity if finance minister Sitharaman’s maiden budget is tarnished by such accounting jugglery.