From GST shortfall to MSP hike, Jaitley's fiscal promise faces many hurdles

Finance Minister Arun Jaitley said on Saturday that the government will meet its fiscal deficit target of 3 per cent of gross domestic product for the year, without cutting capital expenditure. This statement of intent aimed at markets and investors, is being considered bold by policy watchers and analysts, especially given the various challenges on revenue and spending front. 

After Prime Minister Narendra Modi chaired a review of the 2018-19, Union Budget and the work done by various departments of the finance ministry this year, Jaitley said that the Centre will end the year without any capex cut and will collect direct taxes in excess of budgeted targets. Jaitley did not make the same claim for goods and services tax (GST), though government officials say that any shortfall in GST will be made up by other sources of revenue. The finance minister also said that the disinvestment target for Rs 800 billion for the year will possibly be exceeded.

After the April-July fiscal deficit data was released on August 31, several analysts hinted that the government may need to go for cuts in capital expenditure to meet the fiscal deficit target. That assessment has now been put on hold after Jaitley’s latest statement, with economists saying that a clearer picture of the Centre’s fiscal health will emerge around December. 

However, there are certain pressures that experts point to (see box). 

“With crude threatening to break $80 a barrel, the pressure on the external sector looks more palpable. In this context, the government’s decision to not go for excise duty cuts will cheer the markets. We believe that GST collections will pick up pace in the second half of the year. However, the Centre needs to keep a close eye on disinvestment receipts and non-tax revenue,” said Soumya Kanti Ghosh, chief economist, State Bank of India. 

The Centre’s total net tax revenue target for the year is Rs 14.81 trillion, after refunds and devolution to states. The target for personal income tax is Rs 5.2 trillion, while for corporate taxes it is Rs 6.2 trillion, both after refunds but before devolution to states. So far this year, the buoyancy for both has been much lower than expected, though collections are expected to jump in the second half of the year. 

The combined central GST, state GST and integrated GST target that the government is aiming for is Rs 1 trillion per month. The monthly collection plummeted to the lowest in the current fiscal year in August and stayed well below the government’s target of Rs 1 trillion for the fourth consecutive month of the current fiscal. It is expected to slide further in September and there needs to be a substantial pick-up in the second half for the Centre to not breach is deficit targets.

As of date, proceeds from disinvestment have been Rs 92 billion. Over the coming months, the Department of Investment and Public Asset Management is planning to ramp up initial public offerings for sale for a number of companies. 

“The government may want to explore options to shore up its revenues in order to prepare for any exigency. It may be more feasible to raise revenues through accelerated divestment, higher GST rate on certain products such as gold, which will also help contain CAD and higher import tariffs on certain products and components (for consumer items)…,” said Kotak Institutional Equities in a note to clients on Tuesday.

On the expenditure front, analysts don’t expect any room for curbs in revenue expenditure since this is an election year and the funding for the Centre’s flagship projects needs to be sustained.

Pressure Points

Revenue

• GST well below Rs 1 trillion monthly target so far

• Dividends from PSUs, spectrum revenues under threat of not meeting targets

• Disinvestment needs to pick up steam to meet Rs 800 bn target

Expenditure

• Uncertainty on final MSP outlay

• Ayushman Bharat scheme outlay could breach estimates

• As govt heads into election, spending needs to be maintained

• Oil prices could affect subsidy outgo