Govt may resort to tested ways to meet fiscal deficit target of 3.3% of GDP

The government is facing an increasingly uphill task in meeting the fiscal deficit target of 3.3 per cent of gross domestic product (GDP) for 2018-19, at a time when the shortfall in goods and service tax could be around Rs 1 trillion, and any gains in direct taxes and other revenue sources may not be enough to make up for that.

To ensure that the target is met, the Centre will resort to time-tested methods of rolling over additional subsidy burden, taking back unspent amounts from ministries, converting certain expenditure entries as advance, and running down the cash reserves, officials and experts say.

“One advantage that the government has is that the accounting system is cash-based. So, as long as I don’t pay for any scheme right now, even though it is budgeted, it won’t get reflected in my accounts,” said Madan Sabnavis, chief economist with CARE Ratings. “If the government is stressed in terms of the deficit, it can always run down the cash reserves.”

“The finance ministry will do what it always does. As it is, a portion of oil and fertiliser subsidy payments are rolled over to the first quarter of the next fiscal year. These are released once audited accounts of the oil and fertiliser companies are available,” said an official.

The Centre’s budgeted petroleum subsidy outlay for FY19 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.

While those estimates may come down as global crude oil prices ease, it is still expected to be higher than budgeted estimates. Business Standard had reported earlier that the government was planning to roll over payments of at least Rs 200 billion in additional oil subsidy to the first quarter of FY20.

The finance ministry’s expenditure department also takes back sums from other ministries that were allocated but not spent.

Finance Minister Arun Jaitley has publicly committed to meet the fiscal deficit target without compromising on capital expenditure. Officials say that there will be no capex cuts. But some savings in administrative expenditure is anticipated.

The expenditure department is also ensuring fresh allocations are kept at a minimum. It has just concluded a round of meetings with all ministries as part of the pre-budget exercise to decide the revised estimates for 2018-19 and set budget estimates for 2019-20.

Whatever extra the ministries demand will be given out after Parliamentary approval through the supplementary demand for grants in the Winter Session. As an example, the rural development ministry has asked for extra allocation over and above the budgeted Rs 550 billion, as it wants to generate extra work days under the Mahatma Gandhi National Rural Employment Guarantee Act, citing drought-like conditions in Madhya Pradesh and Maharashtra and the recent floods in Kerala.

Sources say that the expenditure department has told the rural development ministry to provide for the extra spending out of its own internal savings in other schemes.

Another method is reclassifying expenditure as advances. A former government official has confirmed that this accounting trick has been used in the past. “It can be done again. You allocate sums to a department or division, and at the end of the year you take it back,” the person said.

In 2017-18, the Food Corporation of India (FCI) returned nearly Rs 500 billion to the finance ministry through this reclassification. The amount given to FCI had been classified as capital expenditure, but was later converted as advance, which needs to be returned within a financial year.

As reported earlier, the Centre could face a shortfall of over Rs 1 trillion in its share of goods and services tax, and could see additional expenditures of over Rs 450 billion. Apart from 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 that it would provide Rs 20 billion extra for state-run carrier Air India, apart from the Rs 163 billion announced in the budget. The outlay for Ayushman Bharat Yojana could also increase by Rs 40 billion.

In a report on Thursday, State Bank of India’s Chief Economist Advisor Soumya Kanti Ghosh had said that the shortfall in GST collection would severely affect the spending ability of the government this fiscal year. The cut in federal spending could be a massive Rs 700 billion, which is about a fourth of the capital expenditure for 2018-19, he said.