The transfer of funds from the Reserve Bank of India (RBI) to the government helped the Centre moderate its fiscal deficit to 78.7 per cent of the Budget Estimates (BE) in the first five months of the current fiscal year (2019-20, or FY20), against 94.7 per cent a year ago.
In absolute terms, the deficit stood at Rs 5.5 million trillion in April-August FY20, against Rs 7.03 trillion budgeted for the entire year.
Despite a grim tax revenue position, the government has managed to keep the deficit, in terms of percentage of the BE, at a lower level in April-August FY20, compared to last year, largely because of the transfer of Rs 1.47 trillion surplus from the RBI to the Centre, which has given a bump to the non-tax revenue portion. As much as Rs 28,000 crore was transferred to the government by the RBI as interim dividend in March 2019.
“The fiscal glidepath, as indicated, in the government is being maintained. The government is maintaining the glidepath to 3.3 per cent as stated in the Budget,” said Economic Affairs Secretary Atanu Chakraborty.
However, experts said the hit to the exchequer to the tune of Rs 1.45 trillion because of corporation tax reduction and subdued revenue collections may still widen the fiscal deficit, compared to the target of 3.3 per cent of gross domestic product (GDP) for FY20.
“Based on our estimate of the government’s tax revenues (after the reduction in the corporate tax rate), its non-tax revenues (after the higher-than-budgeted transfers from the RBI) and nominal GDP of Rs 208 trillion for FY20, the extent of fiscal slippage may be as high as 40 basis points unless expenditure cuts are undertaken,” said Aditi Nayar, principal economist, ICRA.
The Centre’s non-tax revenue touched 63.4 per cent of the full year’s target by August at Rs 1.98 trillion, against 40.1 per cent of the BE achieved in the same period last year. Besides, expenditure compression, mainly capital expenditure (capex), has also kept the fiscal deficit lower than last year. Capex touched 40.3 per cent of the BE up to August this year, against 44.1 per cent of the BE in the first five months of 2018-19 (FY19).
Although moderation in capex may impact economic growth numbers, Finance Minister Nirmala Sitharaman last week announced a steep cut in corporation tax rates, which is expected to revive private investment. However, that may reflect in the economic data with a significant lag, whereas the tax-cut will hit the exchequer.
Sitharaman announced a corporation tax rate cut to 22 per cent for companies, which becomes 25.17 per cent after accounting for cess and surcharge, against the current rate of 34.94 per cent. However, the reduced rate will apply only to those companies not availing exemptions, and others could opt for the reduced rate once the sunset clauses on the exemptions end. The rate of minimum alternate tax was also cut from 18.5 per cent to 15 per cent.
Those incorporating in India from October this year and going for production by March 30, 2023, will get a lower corporation tax rate of 15 per cent, which comes to a bit over 17 per cent after cess and surcharges.
At Rs 4 trillion, tax revenues of the Centre constituted 24.5 per cent of the BE in the first five months of FY20, against 24.7 per cent in last year’s corresponding period. Direct tax collections have been growing around 5-6 per cent, against a growth target of 17.3 per cent for the fiscal. Similarly, goods and services tax is seeing a collection of around Rs 1 trillion a month, against a required rate of Rs 1.2 trillion a month.
The deficit stood at 8.8 per cent of GDP in the first quarter (Q1) of FY20, an improvement over the Q1FY19 figure of 9.5 per cent.
Non-debt capital receipts, at about Rs 18,000 crore, accounted for 15.2 per cent of the BE, against 16.3 per cent a year ago. Disinvestment receipts stood at about Rs 12,000 crore, representing 12 per cent of the BE — the same as the first five months of last year.
Of the Rs 12,357 crore in divestment proceeds that Department of Investment and Public Asset Management has garnered, about Rs 11,000 crore has come from a follow-on offering of central public sector enterprises’ exchange traded fund (ETF).
This means that with less than six months remaining, the government has to garner around Rs 92,600 crore to meet its FY20 budgeted target of Rs 1.05 trillion. Up next is a Rs 5,000-crore follow-on offering of Bharat 22, to be followed by further offerings of the two ETFs. The government is expected to expedite its disinvestment process after getting clearance from the Cabinet this week.
The government kept its expenditure at about Rs 11.75 trillion, or 42.2 per cent of the BE, in the first five months of FY20, against 43.8 per cent a year ago.