HYDERABAD : Alarm bells have gone off on the fiscal deficit—which breached FY19’s target within six months—forcing the Ministry of Finance to deploy an emergency rescue act. Rating agencies are certain the target will be breached, but the government is out to prove them otherwise, with officials scurrying cash chests of departments to trouser a mix-and-match fiscal suit.
Amid lower-than-budgeted tax and non-tax revenue, everyone expects the government to cut capital expenditure (capex), but Finance Minister Arun Jaitley ruled it out, while Economic Affairs Secretary Subhash Garg maintained that the deficit target will be met. So far, facts and fortune aren’t in the government’s favour, with indirect taxes and non-tax revenue falling by the wayside. Despite efforts, aggregate indirect tax collections grew by a pedestrian 4.3 per cent in the first six months as against a mighty 22.2 per cent projected growth. GST collections missed the previous year’s target, yet are estimated to grow by 67 per cent to Rs 7.4 lakh crore. Until now, the revenue run-rate leaves a lot to be desired.
Non-tax revenue is pegged at Rs 2.4 lakh crore, but is likely to disappoint, led by weak divestment proceeds, whose target is set at Rs 80,000 crore, but only Rs 15,000 crore has come in till October. In FY18, disinvestment proceeds, for the first time, not only met the target, but also crossed the estimate. The government had high hopes on Air India stake sale, which was shelved as there were no takers and fresh efforts to dispose of it in bits and bobs could fetch little.
Excise duty cuts on fuel prices could put pressure as the Centre’s revenue will decline by Rs 10,500 crore, 0.05 per cent of GDP, between October 2018 and March 2019. As if the uncertainty on revenue collections isn’t enough, tax cuts for small businesses and a relatively high MSP for farmers ahead of the 2019 general elections is likely to strain the fiscal sources.
Given revenue is weak, the obvious option is to slice capex, as we have seen in the past. For instance, in FY18, capex was cut by Rs 36,000 crore, prompted by a shortfall of Rs 50,000 crore on account of GST. But this fiscal, experts say even a capex cut may be insufficient to offset revenue losses. Curtailing expenditure isn’t the preferred fiscal path and the concept of a fiscal straitjacket constraining expenditure and borrowing to reduce deficit may not be advisable in a country that has excess unutilized capacity.
The government is also insisting ministries, departments and PSUs return all unspent cash, besides, of course, higher dividends. The government borrowings have been cut short by `70,000 crore, which is welcome, but finding this elsewhere could prove to be a challenge. The issue of raiding RBI’s reserves appears tempting, but such a move could dent its credibility.
In June, 2014, presenting the NDA government’s first full budget, Jaitley styled himself as a fiscal hawk and over the past four budgets, projected that his was a party to be remembered as the custodian of fiscal rectitude. Past years saw deficit targets breached, but that didn’t spook rating agencies or investors. For instance, FY18 deficit was 30 bps higher than the 3.5 target.
Until now, Jaitley’s experiment in fiscal prudence tested a hypothesis if you could course your way to growth by shrinking deficit. It may have worked, but for demonetisation, GST, and higher crude prices. The trilemma, collectively, is threatening to make a weak economy further sick. Typically, when tax revenue crawls, instead of running, public spending should be financed by debt. Also, given the election year, government’s tend to discard the fiscal straitjacket, but Jaitley and his men are adamant on sticking to the script. Will they take recourse saying it’s OK to live with the ballooning debt just for a while, until tax revenue plays catch up? We shall know in February.
One may wonder why the obsession with 3 per cent deficit target? It’s because a staggering 97 per cent of our debt is raised internally, meaning borrowed via government securities, etc. A lot of this money comes from household financial savings. As per estimates, household savings to GDP was 10 per cent and foreign inflows 1.5 per cent.
Deficit target
The 2019 fiscal deficit target has been pegged at 3.3 per cent of GDP, or I6.24 lakh crore, but credit rating agencies estimate the deficit at I6.67 lakh crore, or 3.5 per cent of GDP