Piyush Goyal (file photo)
Impending elections and the lure of populist measures are likely to be a toxic cocktail for the NDA government’s budget math as it seeks a second consecutive term in power. If CARE Ratings’ estimates are anything to go by, the government is likely to face a deficit of 3.5% as compared to a targeted fiscal deficit of 3.3%.
Let’s take you through the math; the government had targeted revenue receipts of Rs 17.26 Lk Cr in FY19 but that figure is likely to be lower at around Rs 16.8 Lk Cr as per CARE Estimates. The key pain point here is tax collection, especially GST. While the latest collection figures for January 2019 at Rs 1 Lk Cr throw up a positive surprise, this is only the third time since inception that the GST collection figure has reached its intended mark.
Month after month, GST revenue has consistently fallen short and is likely to miss government’s budgeted target Of 7.5 Lk Cr. The government earned only 56% of the yearly central GST target in the 9 months of FY19 ending December 2018. At this rate, CGST revenues are likely to fall short by an astounding Rs 1.5 Lk Cr. Recent reductions in GST rates have only added to the pain. The shortfall is likely to remain inspite of January’s numbers meeting the target.
Divestment was also going to be a significant contributor to revenue. The government had set an ambitious target of Rs 80,000 Cr, building on record divestment proceeds of FY18. However, adverse market conditions have delayed several PSU stake sale plans and key IPOs have also been put on the backburner. Data reveals that only Rs 15,810 Cr of the targeted Rs 80,000 Cr has been collected so far. The key question then is how the government will meet the target with only two months left this fiscal. The IL&FS crisis has made liquidity conditions worse, and there may not be enough appetite in the markets for any ambitious divestments.
High excise duties have been a recurring characteristic in the country and the exchequer was banking on these proceeds for a significant chunk of revenue. Rising crude prices have however put a spanner in the works and with a resultant excise duty cut, the government will again see a shortfall in revenue from that front. This has also strained balance sheets of Oil marketing companies which have historically paid high dividends. In fact, lower dividends from select PSUs will only add to the revenue pain.
Given this scenario, the revenue target achievement looks bleak. Let’s then turn our attention to expenses. Private capex continues to languish, and India Inc continues to rely heavily on government capex. This being an election year, the government cannot afford to cut down on expenses if it wants to increase its chances of being re-elected. There has been a need to recapitalise ailing PSU banks, and exchequer will be putting in a total of Rs 1.06 Lk Cr to breathe new life into them.
Fortunately, there is a way out. Government’s accounting works on a cash basis which essentially means that any expense which is provided for - or anticipated but not actually paid for - is not reflected in the accounts. This is evident in the case of Indian Oil and Air India where the government run airline has large amount of dues pending to IOC but can avoid payments as adjustments are possible within state owned entities.
Another example is that of subsidies. A subsidy can be implemented but payments can be deferred. This may have a long term impact of higher borrowing costs but is likely to reap immediate rewards in the balance sheet arithmetic. Farmer relief in the form of fertilizer subsidies too would be possible under this method.
Given that we are only a couple of months away from Lok Sabha elections, higher than anticipated expenditure is a very real possibility. Madan Sabnavis, Chief Economist at CARE Ratings believes that a higher fiscal deficit to the tune of 3.5% of the GDP is very much possible and with GST collections falling significantly short of targets and other revenue flows not meeting expectations, it is likely that this too will be exceeded unless some creative tactics are used. A challenging fiscal tightrope lies in wait.
Watch here the number crunching done by CARE Ratings’ Madan Sabnavis on the Budget math