Govt may have to cut capital spending by Rs 700 bn, says SBI report

Growth in Q4 could be below 7%; this is largely due to shortfall in GST collections

The shortfall in goods and services tax (GST) collection would severely affect the spending ability of the government this fiscal, a report by State Bank of India’s research wing has said. The cut in federal spending could be a massive Rs 700 billion, which is about a fourth of the capital expenditure for 2018-19.

This cut would be twice the Rs 363 billion reduction in capital spending the government did in 2017-18 in order to restrict fiscal deficit at 3.5 per cent of the gross domestic product (GDP).

Coupled with an “inevitable” slowdown in global growth, this would have a substantial impact on India’s GDP growth, said Soumya Kanti Ghosh, group chief economic advisor at SBI, and the author of the report. “The growth in the fourth quarter of 2018-19 (Q4) could well go below 7 per cent,” he said.

He said growth would reduce along the financial year, from 7.5 per cent in Q2, to near 7 per cent in Q3, to below 7 per cent in Q3, FY19. However, if oil stabilises at near $65/bbl, India’s current account deficit (CAD) would come down to 2.6 per cent of the GDP, from the earlier estimate of 2.8 per cent, it said.

The report estimates the shortfall in indirect tax collections at Rs 900 billion, of which the major chunk would be due to GST, to the tune of Rs 700 billion. This includes a reduction of Rs 105 billion due to excise duty cuts on petrol and diesel. In addition, a low performing stock market would make the collection of Rs 200 billion as long-term capital gains tax difficult.

Finance ministry officials maintain that the shortfall from GST would be nearly Rs 500 billion. While analysts from research departments of Kotak and YES Bank have their estimate of GST shortfall in line with the government, leading global brokerage CLSA has not ruled out a deficit of more than Rs 1 trillion under GST.

To balance this, direct taxes, customs duties and anti-evasion measures would help the government restrict the expenditure cut. While direct tax collection could exceed the budgeted target by Rs 200 billion, higher realisation from customs duties could add Rs 140 billion over and above the expectation. The excess from recoveries from evaded taxes is put at the higher end of Rs 200 billion.

An additional subsidy burden close to Rs 120 billion would be another pressure point, the report said.

The reduction in capex would hurt the road and infrastructure sector, as the National Highways Authority of India could resort to extra budgetary resources for its spend plan, said Ghosh.

The report indicated that to boost rural sector in times of revenue shortfall, fiscal expansion could possibly be resorted to. “We should not be obfuscated solely with a rigid fiscal policy stance as we must support our rural sector in terms of aggressive policy measures to boost farm income given declining prices,” it said.