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Numbers for the first half of the current financial year suggest that there might have been some improvement in the government’s fiscal performance. But is that enough of an indication that the government would meet the full year’s fiscal deficit target? A K Bhattacharya analyses for Business Standard.
The Union government’s fiscal performance in the first half of 2017-18 shows signs of a turnaround. But that does not guarantee that the government will be able to meet the current year’s fiscal deficit target of 3.2 per cent of gross domestic product. Why does one see a turnaround? After steadily rising in each month from April to August, the government’s fiscal deficit as per cent of its Budget Estimates (BE) in September has declined for the first time. A similar decline in revenue deficit as per cent of BE is also noticeable. During April-August of 2017-18, fiscal deficit as per cent of BE had soared to over 96 per cent. By the end of September, the data for which were released on Tuesday, it is down to 91 per cent. Similarly, revenue deficit during April-August was 134 per cent of BE, but by the end of the first half of the year, it is down to 118 per cent. There is an improvement in the government’s fiscal performance, but it still is in danger zone. A look at the composition of what drives the deficit numbers will explain why meeting the fiscal deficit target for the current year will be a difficult task. First the good news. Tax revenues continue to remain buoyant. At Rs 5.42 lakh crore, they represent an increase of 21 per cent over the first half of 2016-17. Even as per cent of BE, tax revenues during the first half of 2017-18 were 44.2 per cent, compared to 42.5 per cent in the same period of the previous year. Even non-debt capital receipts (largely disinvestment proceeds) have seen a dramatic rise of over 107 per cent in the first half of the current year, compared to the same period of 2016-17. At Rs 27,000 crore this year, they accounted for 32 per cent of BE. Last year, the figures were Rs 13,000 crore with a share of just 19 per cent in BE. The culprit happens to be non-tax revenues, which constitute spectrum auction proceeds, dividends and profits of state-owned enterprises and the Reserve Bank of India.
In the first half of the current year, they fell by 32 per cent to Rs 81,000 crore, accounting for only 28 per cent of BE. In 2016-17, non-tax revenues in the first half were much higher at Rs 1.19 lakh crore accounting for about 37 per cent of BE.Thus, in spite of a healthy increase in tax revenues and non-debt capital receipts, the decline in non-tax revenues has allowed the government’s total revenues of Rs 6.23 lakh crore in the first half of the current year to grow by only 10 per cent over Rs 5.67 lakh crore in the same period last year. At around 41 per cent, there is not much of a difference in terms of the shares in BE in each of the two years. With overall revenues remaining in sync with the estimates, the government’s fiscal deficit numbers should not have seen the kind of slippage that has been witnessed in the first half of the year. The cause of this slippage lies in revenue expenditure, which ballooned in the first half of the current year to Rs 10 lakh crore, an increase of 12 per cent over the same period last year. And in terms of its share in BE, it rose to 54.6 per cent, compared to 51.6 per cent in the same months of 2016-17. In other words, the government spent almost Rs 1.1 lakh crore more in the first half of the current year under revenue expenditure. Compared to that, the increase in capital expenditure in the first half of the current year is quite small at only Rs 11,000 crore. Against Rs 1.35 lakh crore spent last year under capital expenditure, this year the amount was only Rs 1.46 lakh crore. Indeed, as per cent of BE, the government’s capital expenditure fell from 54.7 per cent last year to 47.3 per cent this year. The government did spend more money in the first half of the current year, but the bulk of it was through revenue expenditure. The increase in capital expenditure, which would have made a bigger difference to projects implementation, has remained negligible this year. The clue to staying on the path of fiscal consolidation and achieving the deficit target this year lies in how the government can ensure that non-tax revenues grow in the remaining half of the year to make good the shortfall and how much of the impact of the bank recapitalisation bonds is allowed to be borne this year alone. Equally critical would be how the government controls its expenditure or whether the absorptive capacity of its central ministries continues to remain as poor as in past years resulting in their continued inability to spend the funds allocated to them during the year. The return of these unused funds to the exchequer will help a government stretched for meeting the fiscal deficit target. And of course, the tax collections under GST will have to be watched carefully so that the tax revenue buoyancy seen in the first half can be maintained in the second half of the year.