Fiscal slippage: The denial syndrome

By: |
March 11, 2020 2:00 AM

Despite the govt window dressing numbers, it is expected to exceed FY20’s fiscal deficit target. reforms are urgently needed to improve the Budget’s financial health

In the FY20 budget, the FM had estimated gross tax receipts (GTR) to be Rs 24.6 lakh crore, of which about Rs 16 lakh crore was to accrue to the Centre. In the FY20 budget, the FM had estimated gross tax receipts (GTR) to be Rs 24.6 lakh crore, of which about Rs 16 lakh crore was to accrue to the Centre.

In the Union Budget for FY21, finance minister Nirmala Sitharaman revised the fiscal deficit (FD) for FY20 to 3.8% of GDP—up from the budget estimate (BE) of 3.3%. In absolute terms, the RE is Rs 7.66 lakh crore, against a BE of Rs 7 lakh crore.

Sitharaman explained away the slippage by invoking the recommendations of the NK Singh committee on review of the Fiscal Responsibility and Budget Management (FRBM) Act, which permits breach of the target in case of “far reaching structural reforms with unanticipated fiscal implications”. The justification is untenable as, during the year, there was no reform measure that can be put in the category of ‘far reaching structural reforms’.

The government could slip further even from the revised (albeit higher) figure. According to official data released on February 28, 2020, the FD during the first 10 months up to January 2020 was Rs 9.85 lakh crore, or 128.5% of the RE. Both tax and non-tax revenue collections are trailing.

In the FY20 budget, the FM had estimated gross tax receipts (GTR) to be Rs 24.6 lakh crore, of which about Rs 16 lakh crore was to accrue to the Centre. The RE for GTR is already down to Rs 21.6 lakh crore, the corresponding accrual to the Centre being Rs 14 lakh crore. Even this drastically reduced number is nowhere in sight.

During the 10 months up to January 2020, GTR is Rs 15.3 lakh crore. After transfer of Rs 5.3 lakh crore to states as ‘Devolution of Share of Taxes’, the Centre will be left with only Rs 10 lakh crore. Garnering Rs 2 lakh crore in February and March each—needed to reach the RE of Rs 14 lakh crore—is well nigh impossible. Going by the trend, shortfall of at least Rs 2 lakh crore is inevitable.

Meanwhile, in a desperate bid to make up, the government has launched Vivad se Vishwas (VsV). Under the scheme, which will run till June 30, 2020, beneficiaries can pay disputed tax arrears, without interest and penalty, before March 31, 2020. If the beneficiary pays the amount after March 31, 2020, but before June 30, 2020, they will be need to pay 10% extra. In case the tax dispute is over penalty, interest or fee, the settlement amount payable is 25% of the dues if paid before March 31, 2020. According to the Parliamentary Standing Committee on Finance, there are close to 5 lakh cases involving demand under litigation of about Rs 9.96 lakh crore.

Under a similar scheme—the Sabka Vishwas Scheme (SVS)—on unresolved disputes relating to excise and service tax (under the erstwhile dispensation prior to GST) launched on September 1, 2019, the government had garnered Rs 38,000 crore, or 15% of the amount under dispute. Therein, nearly 95% of taxpayers came forward because they were given waivers up to 70% of the demand in certain cases. In sharp contrast, under VsV, the litigants are required to pay the entire amount under dispute. Hence, they won’t avail of it.

With regard to proceeds from disinvestment (a major item of non-tax proceeds), in July 2019, Sitharaman had budgeted for Rs 1.05 lakh crore. Against this, the RE is Rs 40,000 crore short, or Rs 65,000 crore, and collection up to January 2020 is only Rs 18,000 crore. It is highly unlikely that the shortfall—Rs 47,000 crore—will be made up during the remaining two months. Together with shortfall in tax collection, we are looking at an additional deficit of about Rs 2.5 lakh crore, which will add 1.2% to the RE of 3.8%.

The reported FD does not capture the deferred subsidy payments (DSPs), i.e., payments that are due in a given year, but are deferred to the succeeding year (courtesy, a flawed accounting method which recognises payments when made). For FY20, DSPs for food, fertiliser, and fuel subsidies are Rs 1.1 lakh crore, Rs 70,000 crore, and Rs 30,000 crore, respectively. This adds up to Rs 2.1 lakh crore. The FY21 budget acknowledges these in an annexure, but does not reflect them in numbers. This causes a further 1% slippage.

The figures also don’t include extra-budgetary resources (EBRs)—a euphemism for borrowings by agencies and PSUs such as the National Highways Authority of India (NHAI), made on behalf of the sovereign government—though these are recognised. On inclusion, EBRs will further escalate the FD.

For FY21, Sitharaman estimated the FD at 3.5%, against the 3% required under the FRBM Act. This is based on a GTR of Rs 2,423,000 ,crore which is more or less the same as the BE for FY20. The corresponding accrual to Centre is about Rs 15.75 lakh crore—Rs 1.75 lakh crore higher than the FY20 RE of Rs 14 lakh crore. When compared with the likely actual for FY20—about Rs 1,200,000 crore—the government is looking for an increase of Rs 3.75 lakh crore, or 31%!

On the other hand, allocation for subsidies is much lower than what is required, the two key items where under-provisioning is large being food subsidy (`1.03 lakh crore) and fertiliser subsidy (Rs 80,000 crore).

The target for proceeds of divestment, at Rs 2.1 lakh crore, is also unrealistic. More so, when one considers the impending slowdown in the global economy—accentuated by the Coronavirus outbreak—and the Indian economy being projected to remain sluggish having dimmed chances of ‘strategic sale’ in particular.
As a consequence, even FY21 will end up with deficit of at least 6%, against the 3.5% projected in the budget.

It would appear that the government, having decided on a target, takes recourse to all sorts of tactics—inflated tax revenue projection, DSPs, EBRs, dividend payments by PSUs, etc—to somehow achieve it. This practice should be shunned. It needs to focus on ‘expenditure reforms’ to bring about sustainable reduction in spending, especially in major subsidies. There is also a dire need for reforms in the tax systems. Studies show that only a fraction of high income earners pay tax. This anomaly must be corrected.

While dealing with honest tax payers in a fair and transparent manner (and even reward them), the government should deal with evaders sternly, ensuring that the latter don’t use loopholes in the law to evade the taxman. Even more crucial, the courts should give their orders on tax disputes in a fast track mode (Rs 996,000 crore locked in direct tax disputes says it all).

Sans these reforms, any amount of window dressing of numbers, or remaining in denial mode, will do nothing to improve the financial health of the Union Budget.

The writer is Policy Analyst www.uttamgupta.com. Views are personal

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