The revenue challenge

The new government must focus on its revenue streams as it prepares for its first Budget

How much of the expenditure compression during 2018-19 has been achieved by deferring expenditure to the following year? Or how much of it was the result of off-Budget borrowing by public sector entities? 

The Union government had cut its total expenditure by about Rs 1.45 trillion over its revised estimates for 2018-19. Of this, Rs 13,000 crore was cut on account of capital expenditure and Rs 1.32 trillion under revenue expenditure. 

As has already been reported, the bulk of the expenditure compression was achieved through off-Budget borrowing. The burden of such borrowing has fallen on many public sector undertakings (PSU) such as Food Corporation of India (FCI), Housing and Urban Development Corporation, National Housing Bank and Rural Elec­trification Corporation. 

Even though there is no official confirmation of such borrowing, the figures put out by the Controller General of Accounts (CGA) have revealed it all. For instance, the CGA’s 2018-19 figures show how the food subsidy bill came down by a whopping 40 per cent over Rs 1.71 trillion mentioned in the revised estimates. 

The decline in the food subsidies bill accounts for over half of the total revenue expenditure compression. That the entire burden has been shifted to the FCI can be gauged from the fact that the April 2019 numbers reveal no impact of any deferred expenditure. 

In April 2019, the government released Rs 46,862 crore of food subsidy, compared to Rs 48,430 crore in the same month of 2018. Even as a percentage of the Budget estimates for the two years, the government’s food expenditure bill was lower at 25 per cent in 2019 compared to 29 per cent in 2018. Clearly, there is no impact of deferred expenditure here. Instead the figures indicate a small compression. 

In other words, the government may have managed to completely free itself of any deferred expenditure on account of food subsidy in the current financial year. The borrowing burden is now on the FCI. What this means for FCI’s financial health is of course a different matter and a deeply worrying phenomenon for India’s public finance.

In contrast, the government’s subsidy expenditure on account of fertilisers and petroleum products shot up hugely in April 2019. Compared to a subsidy spend of Rs 2,582 crore for petroleum and Rs 7,124 crore for fertilisers in April 2018, this year the same expenditure has more than doubled to Rs 5,281 crore and Rs 16,943 crore, respectively. This is puzzling. In the final CGA figures for petroleum and fertiliser subsidies during 2018-19, there was no major reduction, compared to the revised estimates. Yet, the April 2019 expenditure shows a significant jump. 

It is, however, clear that the government’s major subsidies bill on account of food, petroleum and fertilisers will not be a cause for concern during 2019-20. Without the burden of any deferred expenditure, meeting the major subsidies bill of Rs 2.96 trillion should not be a problem, as long as international crude oil prices remain within a range of $65-70 a barrel. 

The CGA figures for April 2019 also outline the revenue challenges before the finance ministry. The ministry team, currently busy preparing the full Budget for 2019-20, must have noted that the net tax revenue in April 2019 was estimated at Rs 71,637 crore, which represents a 24.5 per cent increase over the net tax revenue of Rs 57,533 crore in the same month of 2018. 

This level of revenue growth would have been a cause for celebration in the normal course. But, thanks to the sharp drop in actual revenue collections compared to the revised estimates, this underlines the huge revenue challenge that lies ahead. The net tax revenue growth target for the current financial year is now as high as 29.5 per cent. Can the net tax revenue growth be raised further during the course of the year? Or should the Budget makers recognise the challenge and try to make the targets look more realistic?

Non-debt capital receipt is the only item on the revenue side that provides some comfort. The government booked a revenue of Rs 2,350 crore of revenue from disinvestment in April 2019. Of this, Rs 476 crore was mobilised by selling 12 per cent stake in Rail Vikas Nigam Limited through an initial public offering and Rs 1,874 crore was raised by sale of enemy property. This was substantially higher than Rs 435 crore of such receipts recorded in April 2018.

Even though the government may have been in election mode in April 2019, it seems both tax revenues and disinvestments did well, bringing down the overall fiscal deficit as per cent of the Budget estimates compared to the same month of 2018-19. Perhaps, more attention needs to be paid to these two areas as the new government readies to present its first Budget on July 5.