 "A silent fiscal crisis?")
This year’s Budget speech was the first I have seen that, in my memory, has no paragraphs on the fiscal situation which, along with the tax proposals, is at the core of any Budget. However, it outlines the contours of government economic policy more generally, and does it well. It also directly addresses concerns regarding the banking and financial sectors with concrete proposals to tackle the currently troubled situation.
In my previous column (Some medium-term fiscal arithmetic, June 7), I argued that the Centre’s fiscal space was severely constrained. It is for this reason, perhaps, that the speech avoids any mention of the macro-fiscal situation. This is understandable: It has not been the tradition in India to confront such difficulties openly.
The macro-fiscal numbers presented with the Budget documents suggest “business as usual” (see table). The total expenditure as per cent of GDP continues to shrink from 13.34 per cent in 2014-15 to 13.2 per cent in 2019-20. Revenue receipts increase by only 0.35 per cent of GDP in the same period. Collectively, this has allowed government to secure a fiscal deficit-GDP ratio of 3.4 per cent in the 2018-19 (RE) compared with 4.1 per cent in 2014-15. Thus fiscal consolidation has been secured by consistently reducing the size of the Central government and modestly increasing the revenue-GDP ratio.
This was looking good until I read Table 1, Chapter 2 Vol II, of the Economic Survey (ES). There, the provisional accounts for 2018-19, as reported by the Controller General of Accounts (CGA), has presented data that is very different from those in the revised estimates (2018-19 ES in Table). According to the CGA data, the revenue-GDP ratio is 8.2 per cent, a full percentage point lower than reported in the revised estimates. But the ES pegs the fiscal deficit at 3.4 per cent, the same as in the revised estimates. How is this done given the stunning shortfall in the tax-GDP ratio? Well, the total expenditure-GDP ratio reported in the ES is 0.85 per cent of GDP lower than the 2018-19 (RE). The remaining 0.15 per cent is secured by assuming a slightly higher GDP growth rate than that used in the 2018-19 (RE).
This is worrying. If the survey is correct, it is most certainly not business as usual. The Central government would have shrunk by 1.1 per cent of GDP since 2014-15. Our revenue performance would be dismal compared to previous years. The ability of government to shrink the expenditures by 0.85 per cent of GDP in 2019-20 (as opposed to increase it by 0.15 per cent relative to RE 2018-19) would severely strain attempts to maintain fiscal discipline. For the 2019-20 (BE) to be credible, revenue receipts would need to rise by a whopping 1.1 per cent of GDP, where the Budget allows for just a 0.12 per cent increase.
The CGA is the authorised institution to issue fiscal accounts. If their numbers, as reported in the ES, are way off the mark, then this would cause a collapse in the credibility of the fiscal accounts. But I have full confidence in the fiscal accounts. However, if they are accurate, this would mean that the Budget numbers presented severely underestimate the magnitude of the unstated fiscal crisis that we went through in 2018-19, which cannot be conceivably be fully reversed in 2019-20. At the heart of the crisis is a shortfall in tax revenues which, as the ES makes clear, is mainly due to a shortfall in GST revenues (but also personal income tax revenues), compared to the numbers presented in the RE.
In my previous column (Some medium-term fiscal arithmetic, June 7), I argued that the Centre’s fiscal space was severely constrained. It is for this reason, perhaps, that the speech avoids any mention of the macro-fiscal situation. This is understandable: It has not been the tradition in India to confront such difficulties openly.
The macro-fiscal numbers presented with the Budget documents suggest “business as usual” (see table). The total expenditure as per cent of GDP continues to shrink from 13.34 per cent in 2014-15 to 13.2 per cent in 2019-20. Revenue receipts increase by only 0.35 per cent of GDP in the same period. Collectively, this has allowed government to secure a fiscal deficit-GDP ratio of 3.4 per cent in the 2018-19 (RE) compared with 4.1 per cent in 2014-15. Thus fiscal consolidation has been secured by consistently reducing the size of the Central government and modestly increasing the revenue-GDP ratio.
This was looking good until I read Table 1, Chapter 2 Vol II, of the Economic Survey (ES). There, the provisional accounts for 2018-19, as reported by the Controller General of Accounts (CGA), has presented data that is very different from those in the revised estimates (2018-19 ES in Table). According to the CGA data, the revenue-GDP ratio is 8.2 per cent, a full percentage point lower than reported in the revised estimates. But the ES pegs the fiscal deficit at 3.4 per cent, the same as in the revised estimates. How is this done given the stunning shortfall in the tax-GDP ratio? Well, the total expenditure-GDP ratio reported in the ES is 0.85 per cent of GDP lower than the 2018-19 (RE). The remaining 0.15 per cent is secured by assuming a slightly higher GDP growth rate than that used in the 2018-19 (RE).
This is worrying. If the survey is correct, it is most certainly not business as usual. The Central government would have shrunk by 1.1 per cent of GDP since 2014-15. Our revenue performance would be dismal compared to previous years. The ability of government to shrink the expenditures by 0.85 per cent of GDP in 2019-20 (as opposed to increase it by 0.15 per cent relative to RE 2018-19) would severely strain attempts to maintain fiscal discipline. For the 2019-20 (BE) to be credible, revenue receipts would need to rise by a whopping 1.1 per cent of GDP, where the Budget allows for just a 0.12 per cent increase.
The CGA is the authorised institution to issue fiscal accounts. If their numbers, as reported in the ES, are way off the mark, then this would cause a collapse in the credibility of the fiscal accounts. But I have full confidence in the fiscal accounts. However, if they are accurate, this would mean that the Budget numbers presented severely underestimate the magnitude of the unstated fiscal crisis that we went through in 2018-19, which cannot be conceivably be fully reversed in 2019-20. At the heart of the crisis is a shortfall in tax revenues which, as the ES makes clear, is mainly due to a shortfall in GST revenues (but also personal income tax revenues), compared to the numbers presented in the RE.
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