Falling short of revenue receipts and compensating the shortage with the cut in expenditure may keep the government in-line with the financial targets, but without economic growth. GST collections for the month of July has slightly improved to Rs 1.02 lakh crore but the current average monthly collection including refunds is still Rs 91,500 crore. This requires an average GST collection of Rs 1.14 lakh crore for the rest of the current financial year to meet its annual target. At this pace, the government could see a shortfall of Rs1.8 lakh crore in GST collections, according to a report by Kotak Economic Research. Direct tax collection has also disappointed in the first quarter. Overall tax receipts are under pressure from both direct and indirect taxes.
On the other side, the growth rate of key areas like cement production, passenger vehicle sales, two-wheeler sales and industrial consumption of petroleum products in June has remained in negative. The growth rate of core infrastructure also slowed to 0.2 per cent in June. Despite a contraction in the key economic areas, the government’s expenditure contracted by -13.2 per cent in June.
“The government may have to soon make a choice between expenditure cuts or to allow fiscal slippage,” said the Kotak Economic Research report. This could have a significant impact on the fiscal math, given that other taxes have also not been faring well owing to the sluggish growth in the economy, according to the report. The government will eventually face a tough choice between fiscal slippage and sacrificing growth.
The government may choose to cut down expenditure to avoid financial slippages, but that may have repercussions on growth. The Kotak Economic Report says that due to the sharp contraction in growth of key economic areas, the government may have to focus on growth by allowing the fiscal slippages. As a consequence, some of the recent gains in the bond market may reverse and financial burden may increase.