Optimistic projection

Doubts emerge about the Budget's tax revenue estimates

The Union Budget for 2020-21 has rightly received plaudits for attempting to restore some transparency and credibility to the government numbers. The extra-budgetary borrowing has been explicitly accounted for in some respects and the revenue and expenditure numbers, at first glance, do not seem out of line with reality. Yet it is important to note that on closer analysis several aspects of the budgeting are, in fact, optimistic. Some have focused on the difficulty of raising Rs 2.1 trillion from the markets in 2020-21, given that this disinvestment target is well above what has been achieved in previous years. But questions should also begin to be asked about the tax revenue assumptions for both the current and next year. As this newspaper has reported, when the tax revenue assumptions for the current fiscal year are reconciled with the as-yet unaudited provisional actuals for the nine months available, it appears the Budget hopes for 40 per cent of the full year’s tax collection to be obtained in the last quarter of the 2019-20 fiscal year. This is considerably more than what has been the case in previous years, other than in an exceptional year when there was an oil price windfall accompanied by higher fuel taxes.  For comparison, the equivalent proportion of the whole year’s tax revenue collected in the last quarter of 2018-19 was under 30 per cent. While it is possible that the government hopes that significant additional tax will accrue through extra effort and a perceived revival in the economy, it is nevertheless the case that these assumptions appear hopeful. 

The implications for next fiscal year’s revenue and deficit targets are worrying. If historical patterns are met and the government falls short of its 40 per cent target in the last quarter, then the increase in tax revenue budgeted for 2020-21 over 2019-20 reaches alarming and unrealistic proportions of over 20 per cent. This is improbable, given that nominal growth is low at the moment. It would almost certainly lead to another climbdown in terms of the Budget numbers. The finance ministry will be hoping for positive shocks to revenue to compensate for this probability. One such shock could be provided by the dispute settlement scheme for direct taxes proposed in the Budget. If the take-up for this scheme is large enough, then the Budgeted tax revenue would be more than sufficiently supplemented. 

The consequences of overestimating tax revenue for the deficit projections should be taken into account. The finance minister has already invoked the escape clause in the Fiscal Responsibility and Budget Management Act, in spite of there being no major structural reform in 2019-20 that would justify such slippage. If the optimistic tax revenue projections are not borne out, then the fiscal deficit will appear even worse than it is currently. The impact for India and the broader economy must, therefore, be taken into account. Rating agencies and international organisations have already pointed out that India’s general government deficit is high compared to its emerging market peers. This would further worsen that comparison, putting at risk India’s credit rating and its companies’ ability to raise funds globally.