By Priyanka Venkat
The need to practice fiscal discipline cannot be overstated. A high fiscal deficit can have serious ramifications on a country’s growth. This is probably why India crossing its fiscal deficit target by November end itself has everyone worried. A fiscal deficit occurs when the total expenditure of the government, exceeds its total revenue. According to data released by the government, the fiscal deficit for the period April-November reached Rs. 6.12 lakh crore, higher than the target of Rs. 5.47 lakh crore for 2017-18.
States cross fiscal deficit target
The target for the central government was set at 3.2 percent of GDP for 2017-18. However, with the Centre intending to borrow an additional Rs. 50,000 crore, the deficit could touch 3.54 percent. Moreover, the increased fiscal deficit of states will make it harder to reach the target.
Estimates put forth by analysts show that the combined fiscal deficit of states is at three percent of GDP, while the budgeted deficit that they were expected to comply with, is 2.7 percent. It is therefore quite possible that even if the Centre is able to restrict its fiscal deficit to 3.5 percent, it will still not be able to bring down the consolidated fiscal deficit to the budgeted 6 per cent. India has not been able to stay below the six percent deficit mark since 2007-08 when it was four percent.
Raising the tax base to help meet target
The government is now in damage repair mode and has limited time to rectify the situation. An SBI report, titled ‘ India’s Public Finance Trends’ highlighted the immediate need to raise the tax base in the country to help meet the fiscal deficit target. Simply put, raising the tax base refers to increasing the number of people who have to pay tax. This will increase the tax revenue, thereby helping to reduce the fiscal deficit. There are many ways to do this—reducing exemptions likes those given for agricultural income, reducing the income tax threshold limit or even taxing more goods or services. However, all of these methods described are likely to negatively impact the poor, especially during a time of slow growth.
India’s tax revenue base is very small. The report said, “However, in the ultimate analysis, in a country where close to only 4 per cent of the population pays taxes, it is urgently needed that the tax base is increased so that austerity measures are not required to remain on the path of fiscal consolidation.” The government could widen the tax base through digitisation. While demonetization has been largely criticized for implementation, a benefit that can be leveraged is the large amount of financial data that was made available to the government. Businesses, which earlier evaded tax through the non-reporting of incomes, will now be brought into the ambit to pay tax. The Goods and Services Tax, after ironing out structural issues, could help improve tax compliance. It will also help in increasing the reporting of sales of businesses. Moreover, most of the tax payments and refunds can now be made online. This will introduce a seamless way to file returns and reduce the hassles that taxpayers often face from income tax officers.
The need to curtail revenue expenditure
To tackle the deficit, the government also plans to bring down revenue expenditure while maintaining capital expenditure at existing levels. Revenue expenditure includes salaries, pensions, subsidies provided by the government and so on. Revenue expenditure for the year was budgeted at six percent growth, whereas revenue receipts were set at 6.5 percent.
However, the revenue expenditure growth more than doubled and revenue receipts fell to about a third of the target set. In the April-November period, revenue expenditure growth rose to 13 percent, while revenue receipts grew by a mere two percent. The fall in revenue receipts is largely attributable to the fall in non-tax revenue. Non-tax revenue includes spectrum fees and transfers of surplus income by the central bank to the government. The RBI transfers its surplus income to the government every year. This transfer is important as it helps the government reduce either its deficit or its borrowings. Low receipts make it harder to spend on important avenues such as infrastructure, which further impedes growth. It is therefore quite evident that high revenue expenditure and low revenue receipts played a massive role in creating the deficit.
The government needs to take the necessary measures to cut down revenue expenditure if it hopes to come close to the target. Whether it will actually do the needful, is the question. The government is under scrutiny to deal with the piling issues in the agricultural sector where an increase in revenue expenditure is possible. Additionally, the government is aiming at about Rs. 72,500 crore of disinvestment. Disinvestment refers to the government selling its assets. The funds raised will help towards reducing the deficit. Narrowing the fiscal deficit isn’t going to be easy. The next few months will define the direction in which India will proceed. We can only hope that it is upwards from here.
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