By Priya Saraff
On March 28, India’s fiscal deficit values till February were released by the Controller General of Accounts (CGA) to show that the fiscal deficit has exceeded the Revised Estimates (RE) by 20.3%. In other words, the government now has only one month to rein in the deficit and meet the revised fiscal deficit target of 3.5% of the GDP.
Indian government officials appear to be confident that this ambitious goal can be achieved. Both Finance Secretary Hasmukh Adhia and Economic Affairs Secretary Subash Chandra Garg have expressed confidence about keeping a check on nation’s fiscal deficit. Garg added that the preliminary values for March suggest that India is very “close to meeting the target.”
The fiscal deficit values
The information released shows that when it comes to receipts, tax receipts are 81.6% of RE, while non-tax revenues are only 60.2% of RE, and non-debt capital receipts have come to 90.1%. Overall, the total receipts are just 79.1% of RE. In case of expenditure, revenue expenditure is at 87.5%, capital expenditure is at 108.9%, and total expenditure is at 90.1%.
Amongst the ministries, the department of atomic energy, the ministry of communications, and the ministry of consumer affairs, food, and public distribution have exceeded their revised estimates the most, by 7%, 18% and 32% respectively.
How to avoid fiscal slippage
A surplus of Rs 1.2 lakh crore in March is required for the deficit to come up to Rs. 5.9 lakh crore. But how can this be achieved? It would likely either require high revenue receipts or reduced expenditure.
In case of receipts, GST collection for the month of February (as of March 26) is at Rs 851.7 billion. The Indian government’s direct tax collection is also expected to be good. However, the final outcome will be dependent on non-tax revenues.
The RBI claims it is prepared to provide the government with another Rs 100 billion of its surplus. Disinvestment has also brought in Rs. 1 trillion, of which roughly Rs. 75 billion has been allocated for March.
Some ministries are also believed to have returned money that was not spent on capital expenditure.
“There were no major expenditure cuts but there were some natural savings as some departments were not able to spend the money allocated to them by 31 March,” Adhia said, Livemint reported.
The railway ministry’s funding was also reduced by Rs 150 billion. However, when it comes to telecommunications revenue, estimates fell from Rs 443 billion to Rs 307 billion due to lack of auctions, lower license fees, and spectrum charges. The burden then seems to fall on the dividends of Public Sector Units (PSUs) – but the estimates for these have reduced from Rs 675 billion to Rs 548 billion.
The causes of overspending
The spike in expenditure is believed to be due to increasing prices of oil and capital-intensive government schemes. Revenues have dropped following the reduction in corporate tax from 35% to 25%. GST revenues have stayed lower than the expected Rs. 90,000-95,000 crores consistently.
An anonymous source told DNA that this was because of an over-dependence on digital filing of GST returns. At present, the only way to monitor payment of GST is through invoice matching. Taxes on unofficial transactions (grey market) are therefore never brought into the GST system. Mr. DK Srivastava, of E&Y India, claimed that reducing expenditure may be easier than increasing revenue, however, there is limited scope for such a strategy to be effective. In other words, it is likely that the fiscal deficit target will be surpassed.
What happens next year?
With this large breach of the deficit, it is important to also look at budget deficit estimates for the upcoming year. Already, the numbers have been revised from 3% to 3.3% of the GDP for the 2019 financial year(FY). At present, there are conflicting opinions about whether this is achievable, but there is agreement on the fact that GST collections must be increased.
This can only be done by implementing anti-evasion measures, such as the e-way bill and invoice matching. The need of the house appears to be the call for a stabilised GST system. Concerns have been raised over the possibility of the government reducing its capital expenditure to achieve the budget. This seems to be a trend, as the budgeted capex for FY 2019 is 1.6% of the GDP, the lowest it has ever been.
In the current fiscal itself, the capex – set to grow by 11% – has instead, seen a decline of 4%. India’s low rates of private investment makes it imperative that the government not forgo capital expenditure. While there are concerns about the upcoming elections possibly leading to excessive spending, the government has announced that it will significantly reduce its borrowings for the first half of FY 2019 to 48% of the budget as compared to an average 60-65%.
Importance of fiscal consolidation
Fiscal consolidation refers to the policies undertaken by governments at various levels to reduce deficit. While a fiscal deficit spurs growth, a high deficit has several drawbacks. It leads to inflation, and in some cases, could lead to higher taxes (the government increases taxes in order to repay its debt). It could increase interest rates – which in turn could reduce the already low private investment levels. It is in India’s best interest to work towards the path of fiscal consolidation and reduce fiscal deficit.