Recently, former finance secretary Subhash Garg wrote in his blog that the actual fiscal deficit for 2019-20 will be 4.7% of GDP compared to 3.4% as given in the Budget estimates. The major reason for this is that receipts fall short of estimates for both direct and indirect taxes. There was a shortfall of Rs 1.7 lakh crore in the actual revenue receipts compared to the Budget estimates last year too.
In November, the CBDT chairman said that against the Centre’s target of Rs 13.35 lakh crore, its receipts of direct taxes were hardly Rs 6 lakh crore. He said that Rs 1.45 lakh crore may be lost in revenue due to reduction in the corporate tax rates alone. And GST receipts are not encouraging. The slowing of the economy, fraudulent input tax credit based on fake invoices and deficiencies in the GST network may lead to a shortfall of nearly Rs 80,000 crore this year.
The difference between the total expenditure and all receipts of the government, except borrowings in the Budget is termed as fiscal deficit. The government has to borrow to meet this fiscal deficit. This loan is said to be taken from the general public; however, a large part of it also comes from banks and financial institutions. Apart from this, the government also fills the deficit by printing additional currency notes through RBI. This is called monetisation of deficit. Due to this, the currency in circulation increases, which leads to inflation.
Under the UPA regime, especially UPA-2, by 2011-12, the fiscal deficit had reached 5.7% of GDP. The effect was that inflation reached double digits (nearly 13%) in the terminal years of UPA. The deficit was curbed by the Narendra Modi government. When Modi assumed power, he brought clarity in economic policy; the first decision was to keep the fiscal deficit within limits, as per the Fiscal Responsibility Budgetary Management (FRBM) Act. In UPA’s last Budget (interim Budget of 2014-15), the then finance minister P Chidambaram proposed estimated fiscal deficit at 4.1% of GDP and the previous year’s (2013-14) fiscal deficit was also shown to be less than expected. But economic analysts of that time believed the estimate was in fact fudged, and the actual deficit was much more.
This was done by rigging of data and forced PSUs to give dividends in advance. In such a situation, there was a challenge before the NDA’s finance minister Arun Jaitley to keep fiscal deficit under limits. Jaitley accepted that challenge and kept that year’s fiscal deficit at 4.1% of GDP, in line with Chidambaram’s estimate, in the 2014-15 full Budget. Thereafter, the NDA government steadily reduced the fiscal deficit to 3.9%, 3.5%, 3.2% and 3.3% of GDP in 2015-16, 2016-17, 2017-18 and 2018-19 respectively.
The effect of curbing the deficit was that prices started to come under control. It is seen that inflation continued to fall during the Modi era and consumer inflation reached 3.4% by 2018-19. This was an encouraging sign for the economy, as it paved the way for lowering of interest rates. It is important to note that the policy interest rates are supposed to be directly related to inflation. RBI reduces interest rates when inflation is low. Decrease in interest rates encourages investment. And borrowing for homes, cars and other consumer goods becomes cheaper and EMI comes down. This increases demand in the economy, and people’s well-being improves. It can be said that in the first five years of the Modi government, on the one hand, prices remained under control; on the other hand GDP growth was also better.
Since it is estimated that the fiscal deficit for 2019-20 may touch 4.7%, it is said that this may lead to an increase in inflation. At the same time, the country is facing a slowdown, with the estimated growth lowered from around 7% earlier to around 5%. In such a situation, the possibilities of reduction in interest rates are receding. This may dampen the hopes of increase in investment, housing and consumer demand. In such a situation, while presenting the Budget for 2020-21, the challenge before Finance Minister Nirmala Sitharaman would be to keep the treasury in balance and keep the fiscal deficit within limits.
It is clear that due to slowdown, the receipts of direct and indirect taxes are less than expected. Revenue will be further reduced due to reduction in corporate tax rates. The GST recovery is falling short of expectations; the Centre also has to compensate states for shortfall in their receipts. Significantly, in 2019-20, it will have to compensate states much more than ever before. According to ICRA, for the big nine states alone, the compensation may double from last year to Rs 70,000 crore. So what should the government do?
Today, corporate business is growing, but corporate tax receipts are not increasing. The reason for this is that tech companies, e-commerce companies and large foreign software companies avoid paying taxes. It is well known that the retail business of the country is constantly going into the hands of big foreign e-commerce giants. Similarly, large corporate aggregators have also come in the field of travel, taxi services, etc.
In fact, these companies are capturing the market and data by giving discounts on the strength of their deep pockets. This helps them gain valuation, while in their profit and loss account, they continue to show huge losses. This means promoters are benefiting hugely in terms of valuations of their businesses, but their firms avoid paying tax. Experts constantly suggest that such companies should be taxed by levying a minimum alternate tax based on the volume of their business. We have to understand that the government treasury has been suffering due to this for a long time. Such a concern is being expressed not only in India, but all over the world. Efforts have started in this regard in the OECD countries and France has taken the lead. India will also have to think about this, and only then can the shortfall in government revenue be compensated.
Ashwani Mahajan
Associate Professor, Department of Economics, PGDAV College, University of Delhi
Email: ashwanimahajan@rediffmail.com