Govt confident of meeting fiscal deficit target despite GST shortfall

The Narendra Modi government expects direct tax collections to exceed the budgeted target by at least Rs 300 billion. 

This, along with the portion the Centre can pick up from the goods and services tax (GST) compensation kitty, will help it meet the fiscal deficit target of 3.3 per cent of gross domestic product (GDP) for 2018-19, top government sources told Business Standard.

The fiscal deficit for April-October has come in at Rs 6.49 trillion, breaching the full-year target of Rs 6.24 trillion.

Finance Minister Arun Jaitley has publicly stated the fiscal deficit target will be met without cutting capital expenditure. On Saturday, the Centre released the GST data for November, which stood at Rs 976 billion, much below the Centre’s monthly target of Rs 1 trillion. 

“We are looking at a Rs 700 billion to Rs 1 trillion shortfall in the overall GST. Even if we take Rs 1 trillion, only Rs 500 billion will be the Centre’s shortfall. The rest will be the states’. Since 42 per cent of the Centre’s GST share is devolved to the states, the Centre’s GST shortfall will not be more than Rs 290 to Rs 300 billion,” said a top official.

“We will be ahead on direct taxes by some Rs 300 billion. Then, the compensation cess kitty is expected have a lot of surplus, which is non-devoluble. For example, if there is Rs 500 billion in the kitty at the end of the year, we can pick up Rs 250 billion, which will help us even in the face of additional expenditure,” the official added.

For taking over some portion of compensation to the states, the Centre has legal backing from a recent amendment to the GST Compensation to States Act. 

Part 3 of Section 10 of the Act had stated earlier that 50 per cent of the amount remaining unutilised in the compensation fund at the end of five years will be transferred to the Consolidated Fund of India as the share of the Centre, and the balance will be distributed among the states in the ratio of their revenues from the GST.

According to a notification dated August 29, that part was amended to say that 50 per cent of the unutilised amount can be transferred to the Consolidated Fund of India at any time in any year till the end of the five-year period, when the fund lapses.

“The Centre can dip into the compensation kitty and take out half the sum when it wants. So closer to the end of the year, some amount can be picked up from there to make up for the fiscal shortfall,” said a second official. “The Centre is also doing an advance apportionment of the states’ share of the integrated GST (IGST) and compensation, so that the burden to do so eases towards the end of the year,” the person said.

The Centre’s GST target for 2018-19 is Rs 7.4 trillion, of which the central GST component is Rs 6.04 trillion, the Centre’s IGST share is Rs 500 billion and the GST compensation cess is Rs 900 billion. This will be disbursed among states for any shortfall below a 14 per cent year-on-year (YoY) growth rate from the base year of 2015-16.

On the direct tax front, the combined corporation and income tax budgeted target is Rs 11.5 trillion, according to the Budget documents. The latest data available, till the third week of October, shows that net direct tax collection in the country grew by 15.7 per cent on a YoY basis to reach Rs 4.89 trillion. This marks over 42 per cent of the full-year direct tax collection target. 

The first official quoted above was also confident that the disinvestment target of Rs 800 billion would not only be met but also be exceeded. Including the latest tranche of the central public sector enterprise exchange traded fund, the Department of Investment and Public Asset Management has garnered around Rs 322 billion so far.

“We are confident of a few mergers and strategic sales before March 31,” the official said, alluding to the planned sale of Air India’s ground-handling subsidiary as well as REC’s planned acquisition of the Centre’s stake in Power Finance Corporation.

Analysts and experts, however, are still not convinced the fiscal deficit target can be met without resorting to a rollover of expenditure and forcing institutions like the Reserve Bank of India to shell out additional interim dividend.

“I am not worried about the fiscal target being breached as long as the deficit is widening due to additional capital expenditure. But if the target is met due to rollovers of expenditure and holding back on dues, the quality of the deficit will be questioned,” said Devendra Pant, chief economist, India Ratings. Pant expects the fiscal deficit for the year to be 3.5 per cent of GDP.

Pant raised doubts on the first official’s claims of any GST shortfall being passed on to the states. “I don’t think they can pass on any shortfall to the states. Any shortfall is the revenue they will not get. You cannot pass on what you don’t get,” Pant said.

Aditi Nayar, principal economist, Icra, in a report on Friday, said: “Fears of a fiscal slippage this year may intensify following the sharp 23.5 per cent YoY rise in the fiscal deficit for the April-October period, which has crossed the budget estimate despite the relief offered by the recent correction in crude oil prices.”

Nayar expects a shortfall in indirect tax revenues, including GST and excise duty collections.

As reported earlier, the Centre could see additional expenditure of more than Rs 450 billion this year, over and above the budgeted spending estimates of Rs 24.4 trillion. The Centre’s budgeted petroleum subsidy outlay for the current fiscal was Rs 250 billion. However, by the end of September, the petroleum ministry’s internal estimates put the figure at Rs 460 billion, a jump of around 85 per cent. 

Apart from a higher oil subsidy burden, the central government’s internal spending estimates show that it expects an additional outlay of Rs 200 billion just for the newly announced minimum support price obligations for cereals and pulses. This will be over and above the budgeted food subsidy estimate of Rs 1.69 trillion. 

The government has also announced it will provide a support of Rs 20 billion extra for state-run carrier Air India, over and above the Rs 163 billion announced in the Budget. The outlay for Ayushman Bharat could increase by Rs 40 billion.
 

TARGET PRACTICE
 

• Centre expects direct taxes to overshoot target by Rs 300 billion
• Recent amendment to law governing GST compensation to states allows Centre to dip into kitty
• However, Centre’s own GST shortfall will not be more than Rs 300 billion, they contend
• Officials admit GST shortfall could be Rs 700 billion to Rs 1 trillion
• Analysts disagree, say fiscal slippage is still a real possibility
• Analysts and officials anticipate expenditure rollovers and other methods to meet fisc target