This is the second part of a series on India’s widening fiscal deficit. To read the first part, click here: India’s Widening Fiscal Deficit– Background
Six months into the fiscal year, the government seems to be headed in a direction where its FY19 fiscal deficit target of 3.2% will perhaps be breached. There is consensus among rating agencies and economists that the target will be breached. Analysts and rating agencies peg the FY19 fiscal deficit at Rs. 6.67 lakh crores as against a budgeted Rs. 6.24 lakh crores, pegging the fiscal deficit at 3.5% of GDP resulting in an overshooting by Rs. 39,000 crores. A combination of increased expenditure and lower than estimated revenue is causing the fiscal deficit to widen. Let us look at the factors that are widening the fiscal deficit.
The most important factor is the shortfall in tax and non-tax revenues. In its budgets, the government expected to earn Rs 7.4 lakh crore from GST and Rs 2.6 lakh crore from Union excise duties (primarily from petroleum products). GST revenues are expected to be Rs 6.78 lakh crore, falling short of their target. The SBI Research team expects indirect tax revenue to fall short by Rs. 90,000 crores of which Rs. 10,500 crores is from the Rs. 1.5 cut in excise duty by the centre on petroleum products.
GST collections grew by 4.3% in the first half of the fiscal year as against an estimated 22.2%. Even in the previous fiscal year, GST fell short of the projected figures. Arvind Subramanian, the former CEA, in a recent interview said, “The budget has made unreasonable demands from GST”. Thus, perhaps the revenue estimates were too optimistic. The non-tax revenue is estimated to be Rs. 2.4 lakh crores, is expected to fall short by Rs. 16,200 crores. This is because of lower dividend payout from the RBI and nationalized financial institutions, lower spectrum revenue, and lower disinvestment realization. As RBI has given a hefty dividend payout in FY18, the FY19 payout is likely to be lower as RBI is also focusing on building up its reserves. With nationalized banks struggling, 11 of the 21 nationalized banks are under RBIs Prompt Corrective Action Framework. The remaining have been troubled with their non-performing assets issues.
Divestments, which account for nearly 33% of the estimated non-tax revenue, were estimated to bring in Rs. 80,000 crores. However, the government has been able to mobilize only Rs. 15,247 crores till October. Having not only met but exceeding the target in FY18, an ambitious plan was put forth. However, this seems to be weakening. Global cues such as increased liquidity tightening have also played a role. Air India’s sale was supposed to bring in a large chunk. However, despite the government’s best efforts, this sale has not happened. On the contrary, the government has had to pump in more money and taken on Air India’s debt via an SPV.
Oil has been a major source of problems for the government this year. On the one hand, oil prices shot up, reaching US$ 86 in October. On the other hand, with the Fed raising interest rates and draining liquidity by way of quantitative tightening, emerging market currencies started falling. The dollar nearly touched Rs. 75 in October, the same time oil peaked. As crude oil prices kept surging with the rupee in free fall, the central government was forced to cut excise duty on fuel in October. Analysts expect that this could result in a revenue decline of Rs. 10,500 crores for the fiscal. A double whammy from oil is expected as oil marketing companies (OMC) were forced to cut their prices by Re. 1. This is still in effect despite crude prices softening. As dividends from OMCs make a substantial part of the government’s dividend revenue, this will result in a further decline in revenues.
Revenue expenditure is also expected to increase. With the new minimum support price policy of Kharif crops kicking in, the next half of the fiscal may see elevated expenditure towards the implementation of the new policy. As Ayushman Bharat, the government’s new health initiative, gathers steam, expenditure on this front may also increase.
While the pressure is real, not everything is bad. On the revenue front, there are some positive developments. Customs collections could possibly be larger than budgeted amount of Rs 1.12 lakh crore by Rs 14,000 crore. For the second year in a row, direct tax collections could overshoot the budgeted targets by at least around Rs 20,000 crore with an additional Rs. 20,000 crores accruing to the government by way of evaded tax collections. On the expenditure front, oil prices cooling off are a big positive for India as it eases pressure on the Current Account Deficit as well as subsidies. Perhaps a reversal in the government’s decision of excise and OMC cuts could see a reversal.
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