Budget 2018: Govt cuts extra loans to Rs 200 bn, FY18 fiscal deficit could reach 3.4%

The government has announced that it is reducing additional borrowing to Rs 200.00 billion from Rs 500.00 billion earlier, in the current financial year (FY18), signalling to markets and experts about the Centre’s commitment to fiscal consolidation. 

But even then, the fiscal deficit may reach up to 3.4 per cent of gross domestic product (GDP), higher than the 3.2 per cent pegged in the Budget for 2017-18.

This reduction in borrowing largely came because the government expects the Reserve Bank of India (RBI) to transfer to it a higher-than-anticipated surplus in FY18, a few senior government sources have confirmed independently to Business Standard. Besides, direct taxes have come to the help to the government, rising by 18.7 per cent till January 15, against the Budget target of 15.7 per cent for FY18, according to figures released by the government on Wednesday.

In its books, the RBI had made a provision for Rs 131.40 billion for transfer to a contingency fund. This amount could be transferred to the Centre to bridge the gap, and, in turn, reduce the fiscal slippage.

In December last year, the Centre had stated that it would raise an additional Rs 500 billion from the market in this financial year, causing bond yields to spike. Its net borrowings were budgeted at Rs 4.23 trillion for 2017-18. Adding redemption, gross borrowings were projected to be Rs 5.80 trillion.

The announcement came after widespread concerns over the revenue falling short of expectations, especially on account of shortfall in the goods and services tax (GST) collections.

In a press release, the finance ministry has now said, “Upon a review of trends of revenue receipts and expenditure pattern, it has been assessed that additional borrowing of only Rs 200.00 billion of government securities would be adequate to meet financing needs.” 

The statement said the government did not accept borrowings of Rs 150.00 billion in the last three auctions. The remaining Rs 150.00 billion would be reduced from the notified borrowing programme of the ensuing weeks, it said.

A source in the government that Business Standard spoke to said, “The disinvestment target for the year is expected to overshoot the Budget Estimate by quite a margin. Things are looking up on the direct taxes front as well. The dividend target from state-owned companies will also be met. But there are expectations of a shortfall in the collections from the GST and spectrum sales.” 

The Centre had budgeted indirect taxes to grow at a subdued 8.8 per cent in FY18. Because of the Integrated GST credits, there is not much clarity on the collections from the indirect tax. However, the collections have been coming down every month. The Centre is believed to be staring at a tax revenue shortfall of Rs 250-300 billion in the GST.

The finance ministry has been seeking Rs 430.00 billion in dividends from the RBI as opposed to Rs 306.50 billion that the central bank has already paid. The final payout could be more than what the North Block has been asking for.

The difference in the two numbers is exactly equal to the amount that the RBI had transferred to the contingency fund. 

“The RBI may manage to pay more surplus than what was earlier anticipated. And by March, we will see that the dividend target from public sector undertakings (PSUs) will have been met as well,” said a senior government official.

Put together, dividend from the RBI, state-owned banks, and PSUs is budgeted at Rs 1.42 trillion; of this, non-financial PSUs alone will pay Rs 675.00 billion. 

That portion is now expected to be achieved, in spite of the pressure on PSUs to spend Rs 250.00 billion more in capital expenditure than what was envisaged earlier.

A big positive has been disinvestment, wherein the proceeds could be as high as Rs 900.00 billion as opposed to a target of Rs 725.00 billion.

On the issue of the fiscal deficit, when the additional borrowing of Rs 500.00 billion was announced in late December, analysts expected fiscal deficit as a percentage of gross domestic product to cross 3.5 per cent, as opposed to a budgeted target of 3.2 per cent.

Accounting for the first Advance Estimates for FY18, which were released earlier this month, and all other factors being equal, an additional borrowing of Rs 200.00 billion could widen the fiscal deficit to around 3.35 per cent, said Madan Sabnavis, chief economist at CARE. 

The government breached its fiscal deficit target set in the Budget for FY18 by 12 per cent in November 2017 itself.

This is the highest deviation from the Budget Estimates for fiscal deficit in the first eight months of a financial year since FY09, the year of the global financial crisis.