Low tax revenue, high spend push H1 fiscal deficit to 93% of FY20 target

The Centre’s fiscal deficit touched 92.6 per cent of the Budget Estimate (BE) in the first half of 2019-20, as tax revenues did not keep pace with the target and expenditure could not be compressed much.

Though the figure seemed alarming, it was bit lower than 95.3 per cent in the corresponding period of 2018-19. But then, there was fiscal slippage in FY19 when the fiscal deficit rose to 3.4 per cent of the country’s gross domestic product (GDP) against the target of 3.3 per cent.

From that perspective, the Centre may still rein in the deficit at the targeted level of 3.3 per cent of GDP in the current financial year. However, the tax revenues may take a hit post-October due to cuts in the corporation tax rates announced.

Revenue deficit, which is a gap between expenditure and revenues for the current needs, touched almost 100 per cent (99.8 per cent to be precise) of BE in this period. It was 108 per cent in the year-ago period. Some economists consider revenue deficit as more crucial than fiscal deficit since the government has to borrow just for consumption.

Tax receipts totaled Rs 6.07 trillion in April-September in FY20, which was 36.8 per cent of BE. That was bit lower than 39.4 per cent in the first half of the previous year.

“Worryingly, the gross tax revenues of the Centre have recorded a YoY decline in August and September 2019, resulting in a low 1.5 per cent rise in H1FY20,” Aditi Nayar, principal economist at ICRA, said.

She expected substantial shortfall in tax revenues this financial year, with both direct and indirect tax revenues reporting a subdued performance in the recent months.

Also, the revenue figures till September got a bump due to RBI's transfer of Rs 1.47 trillion to the Centre, which would not be forthcoming in the second half. The RBI's transfer helped the Centre get Rs 2.09 trillion as total non-tax revenue in the first half. This was 66.7 per cent of BE for 2019-20, much higher than 44.5 per cent in April-September in FY19.

“Had there not been one-time windfall gain from the RBI, the fiscal deficit would have looked much worse,” Devendra Pant, the chief economist at India Ratings, said.

Non-debt capital receipts, including disinvestment, progressed at slow pace. Those stood at Rs 20,598 during April-September of the current fiscal year, constituting 17.2 per cent of BE against 19.2 per cent a year ago. The government is banking on big-ticket disinvestment such as BPCL and Air India to meet or cross the target of Rs 1.05 trillion.

On the other hand, the government did not cut expenditure too much since the economy is facing a slowdown. Both the revenue expenditure and capital expenditure were almost at a pace incurred in the first six months of the last year in terms of the percentage of BE. Nayar said expenditure cuts may be inevitable to prevent the fiscal deficit from rising too sharply in FY20.

“Government spending has significantly picked up pace in the months after the presentation of the Union Budget in July 2019, which would support economic growth in Q2FY20. Encouragingly, at 15.3 per cent in H1 FY2020, the growth of capital spending has outpaced that of revenue spending, which has recorded a 14.0 per cent expansion in the same period,” she said.

Pant said in all probability the government will miss its FY20 fiscal deficit target of 3.3 per cent of GDP.