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What a widening fiscal deficit could mean

After weeks of stress and tension over a widening deficit, you could actually see the government claiming on February 1 a significantly reduced slippage in its fiscal deficit

A K Bhattacharya  |  New Delhi 

Budget 2018
Illustration: Ajay Mohanty

Deficit numbers seem to be playing havoc with the Union projections. But you could trust the ingenuity of mandarins to finally present for 2017-18 a figure not much higher than the targeted 3.2 per cent of GDP. The real concerns, however, will remain. And these will be the underlying revenue trends, an overall trajectory of widening deficits of the Centre as well as states, and the dangers of a worsening quality of expenditure, writes A K Bhattacharya


The Union government may fail to meet its target in the current financial year. That, however, is not the real concern.
 
You could trust the ingenuity of the mandarins to finally present a figure for 2017-18 that will not be much higher than the target of 3.2 per cent of gross domestic product (GDP).
 
Some expenditure (read dues to public sector bodies like the Food Corporation of India) will be deferred, disinvestment, including the merger of oil companies, should get a last-minute big push, and state-owned companies may be asked to declare special dividends allowing them to transfer a part of their reserves to reflect in the government’s non-debt capital receipts.
 
Also coming to the rescue of the Union will be the many central ministries, including defence, whose absorptive capacity to spend the money allocated to them continues to remain poor and the unspent money will return to the exchequer, helping the government rein in the deficit.
 
And, finally, a definitional tweak may be introduced to allow to be treated in a manner that it does not widen the government’s
 
So, after weeks of stress and tension over a widening deficit, you could see the government claiming on February 1 a significantly reduced slippage in its It may thus assure investors, credit rating agencies and its critics that the government is after all committed broadly and in principle to fiscal prudence.
 
More importantly, the government will convey to all that it is doing its best to keep the deficit under check even during a year of huge revenue disruption caused by the roll-out of the goods and services tax (GST).
 
The real concerns, however, will remain. And these will be the underlying revenue trends, an overall trajectory of widening deficits of the Centre as well as the states and the dangers of a worsening quality of expenditure.
 
estimates go awry
 
Data for the first eight months of 2017-18 show that the government’s has widened at an alarming pace. is the gap between the government’s revenue expenditure and revenue receipts. While revenue expenditure increased in April-November 2017 by over 13 per cent over the same period of 2016, the government’s revenue receipts increased by less than 2 per cent.
 
These numbers have played havoc with the Union Budget’s deficit numbers. The Union had targeted only 6 per cent growth in revenue expenditure and a slightly higher 6.5 per cent growth in revenue receipts. Instead, revenue expenditure growth has already doubled and the revenue receipts growth has tumbled to a third of the target.
 
It is clear that the problem this year has been caused by the revenue side of the
 
Was it a mistake to project 13 per cent growth in tax revenues for the full year when the knew that the GST would be rolled out during the year?
 
Was the government overambitious in projecting an increase of 14 per cent in non-tax revenue in the current year?
 
And what gave it the confidence that it would be able to rein in its revenue expenditure growth to only 6 per cent, when the growth under this head in 2016-17 was about 13 per cent?
 
In retrospect, both estimation and action to achieve the targets based on that estimation seem to have been flawed.
 
It’s the revenue, stupid!
 
The poor growth in revenue receipts is directly attributable to a 40 per cent drop in non-tax revenues largely on account of reduced transfers of surplus and profits of public sector undertakings (PSU) and the Reserve Bank of India (RBI). Hence, pressure is now building on the PSUs and the RBI to cough up more to bail out the Union government.
 
The growth in revenue expenditure was a little less than the 13 per cent in the first eight months of the financial year. But rising have put paid to such hopes. In spite of a decline in urea subsidies, the government’s on petroleum products has shot up by 30 per cent.
 
Major subsidies at Rs 2.4 trillion account for a small portion of the total revenue expenditure of about Rs 18 trillion. So, a rise in the alone is not responsible for the slippage.
 
It is clear that during the year the Union government has overspent on the revenue side even though its revenue receipts have not kept pace with the target. The net result is that its by the end of November 2017 was over 152 per cent of the year-end projection. In other words, the figure had gone up to Rs 4.89 trillion, up 40.5 per cent over the Rs 3.48 trillion of estimated in the same time of last year.
 
If no corrections are applied, the for the full year might well be around 2.9 per cent of GDP, one percentage point higher than the target and higher than even the 2.1 per cent figure for 2016-17. Widening is a concern. But a that is widening because of rising expenditure and falling revenues can be more troubling.
 
A consolidated problem
 
The implications for the consolidated for the whole of India, including the Centre and states, will be more serious.
 
Already, independent estimates made by analysts have put the combined of all the state governments at 3 per cent of GDP, compared to the budgeted figure of 2.7 per cent for 2017-18. Even if the Centre manages to rein in its to 3.5 per cent, the current year’s consolidated deficit is set to cross the 6.5 per cent mark.
 
The best consolidated for India in the last decade was 4 per cent of GDP in 2007-08. Since then, it has never stayed below 6 per cent. The performance of the current year will give no hope of an improvement on this front, either.
 
Worsening expenditure quality
 
Finally, there is a danger to the quality of expenditure if the government fails to bring down its growth in revenue expenditure from the current estimate of about 13 per cent. The share of capital expenditure as a per cent of GDP has stayed below 2 per cent for the past five years. With revenue expenditure growing faster than projected, there is a danger of that ratio getting worse.
 
With oil prices rising and the government likely to be reluctant to spend its political capital on allowing a corresponding rise in petroleum product prices, there is little hope of the declining in the current or the coming year. And electoral concerns (there are more than a dozen state elections in the next year or so) weighing heavily on the government and the pressure of addressing farmers’ distress mounting, it is reasonable to expect higher revenue expenditure.
 
The only silver lining is perhaps in the composition of the government’s tax revenues. With income-tax revenue maintaining higher growth than that of indirect taxes, whose collections because of the GST will take at least a temporary hit, the revenue from direct taxes as a per cent of GDP is set to increase its lead over the corresponding share of indirect taxes. Tax experts should hail this even in an otherwise gloomy fiscal scenario.


 

First Published: Thu, January 04 2018. 12:56 IST
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