So far, in April-Sept, the Centre’s fiscal deficit has reached 95.3% of budgeted target of FY19 compared to 91% in corresponding period of last fiscal.
By Rajani Sinha & Rutuja Morankar
Over the last seven years, the Centre’s fiscal deficit has been reducing, reversing the uptrend observed post the Global Financial Crisis. Even while the Centre has been following a path of fiscal consolidation, there is concern that the fiscal deficit has been consistently breaching the budgeted target. This year also we could see it exceeding the budgeted target. The other concern is the financing through off-balance sheet by the Centre, in which case the fiscal deficit doesn’t reflect the correct picture. Another critical aspect is to analyse as to how fiscal consolidation is being achieved. How much of it is through sustainable route like increase in tax-to-GDP ratio and through cut in wasteful expenditure?
From FY12 to FY18, the Centre’s fiscal deficit has reduced from 5.9% to 3.5%. In the same period, the total tax-revenue-to-GDP has increased from 10.2% to 11.6%. Direct tax has only increased marginally, from 5.7% to 6%, in the period under review. A large part of the increase in indirect tax has been contributed to by the hike in excise duty on crude oil, effected since 2014, to take advantage of low global crude oil prices. The excise duty on petroleum products as percentage of GDP almost doubled from 0.8% in FY15 to 1.4% in FY18. With the global crude oil prices having increased this year, the government has already cut the excise duty on petrol and diesel once and there is pressure to announce further cuts. Excluding the collections from excise duty on oil, there has been only a marginal increase in indirect-tax-to-GDP ratio. Now with GST, there is expectation that we could see a meaningful jump in indirect tax collection in the long run.
As far as the expenditure side is concerned, the government has achieved a cut in expenditure-to-GDP ratio from 15% to 13% between FY12 to FY18. The revenue expenditure-(that includes government salaries, interest payment, subsidies)-to-GDP ratio has reduced from 13% to 11.6%, with subsidies reducing from 2.5% to 1.5% in the period under review. The reduction in revenue expenditure is definitely a positive trend. The challenge for the government is to ensure the capital expenditure (reflective of investment) is not cut in order to meet the fiscal deficit target. Capital expenditure-to-GDP, which is already very low, has reduced further from 1.8% to 1.6% in the period under review.
Looking at the revenue and expenditure trend, we can conclude that the fiscal consolidation seen in the last few years has been aided by the drop in global crude oil prices and the subsequent hike in excise duty on petrol and diesel. There has been a marginal increase in collection from other components of indirect and direct taxes. While there has been progress in reducing revenue expenditure, the government has also taken recourse to lower capital expenditure in a bid to keep the fiscal deficit under control.
The other issue is off-budget items that helped the government many a times in containing the fiscal deficit. For instance, this year, there are talks that the government may keep part of the additional expenditure due to MSP off-budget by arranging directly the finance for Food Corporation of India from the National Small Savings Fund. Bank recapitalisation bond announced last year was another off-budget item, so were oil bonds in the past. These off-budget items, while they do not immediately add to the fiscal deficit, add to debt and interest payment burden of the government in the future.
Coming back to the current year, the fiscal deficit is again likely to breach the budgeted target of 3.3%. In the year so far (April-September), the Centre’s fiscal deficit has already reached 95.3% of the budgeted target of FY19 compared to 91% in the corresponding period of the last fiscal. Net tax revenues in H1FY19 have recorded a growth of only 7.5% (year-on-year) as against budgeted growth of 16.6% for FY19. While the direct tax collection has been healthy, indirect tax (including GST) growth is much below the target. Moreover, the cut in excise duty on petrol and diesel will shave off `10,500 crore from the Centre’s revenue. The disinvestment revenue of `80,000 crore looks difficult to achieve, given that, so far, the collection has only been around `10,000 crore. There is only support from non-tax revenue (includes interest receipts and dividends received by the government from RBI and PSUs), which has risen by a sharp 35% (year-on-year) in the first half of the fiscal year.
On the expenditure side, there is pressure on the oil subsidy bill due to rising global crude oil prices and some other commitments like the hike in MSP, financing requirement of NHPS (National Health Protection Scheme) and the General Elections next year. Expenditure growth in H1FY19 has been 13.5% (year-on-year), higher than the budgeted growth of 10.1%. There is concern of slippage on the subsidy front, given that 75% of the FY19 budgeted food subsidy and 84% of the petroleum subsidy have been already spent in H1FY19. The government has, so far, not cut the capital expenditure, in order to meet the fiscal deficit target. However, there could be a cut in the capital expenditure going forward as the government tries to meet the fiscal deficit target. There is pressure on the fiscal deficit due to lower revenue collection and increased expenditure commitments. Rising yields on government securities have worsened the situation by increasing the government’s borrowing cost.
Consolidated state budget deficit in FY19 could also exceed the budgeted target of 2.6%, with higher expenditure on salaries and farm loan waivers, flood relief and election spending. Many of the states have agreed to reduce excise duty on petrol and diesel as suggested by the Centre. This would also put some pressure on state government finances. This implies a combined state and Centre’s fiscal deficit upwards of 6%. There may not be increased market borrowing by the Centre, given that they are expecting higher collection from the small savings scheme. However, higher fiscal burden will definitely adversely impact market sentiments and will also be critically viewed by the rating agencies. With consecutive years of slippage in the fiscal deficit target, the government risks losing its credibility on the commitment to the Fiscal Responsibility and Budget Management Act.
Authors are corporate economists
based in Mumbai