How key economic estimates are likely to pan out in Budget 2021-22

Business Standard presents two scenarios on revenues, expenditure and fiscal deficit, based on two different assumptions of the country's GDP the next financial year

The nominal GDP growth that the finance ministry assumes in the Budget for 2021-22 would be a key factor in determining various key figures such as revenue, expenditure and fiscal deficit.

The first advance estimates pegged growth in GDP at current prices at -4.2 per cent or Rs 194.82 trillion for the current financial year on the base of Rs 203.39 trillion in 2019-20.

Economists have varied view on the GDP growth for the next financial year. They pegged the growth at current prices to be in the range of 11-15.5 per cent.

For instance, D K Srivastava, chief policy advisor, EY India, projected this growth to be 11-11.5 per cent. On the other hand, Vivek Kumar, economist at QuantEco Research, projected it to be 15.5 per cent.

At 11 per cent, the size of the economy would be Rs 216.25 trillion and at 15.5 per cent it would be Rs 225.02 trillion in 2021-22.

Assuming both the numbers, let us see where the key figures in the Budget for FY22 may lie.

Revenues:

The most important figure under this head is tax collections, which have been hit by the slowing down economy even during previous years. This year's expected contraction in the economy would deal a further blow to these numbers. Besides slowding economy, tax-GDP ratio too has been coming down in recent years.

While the Centre's post-devolution tax-GDP ratio stood at 7.26 per cent in 2017-18, it came down to 6.94 per cent in 2018-19 and slid further to 6.67 per cent in 2019-20. The ratio had stood at 6.85 per cent in 2015-16 and 7.15 per cent in 2016-17.

However, the recent Budgets had tried to be too ambitious. For instance, the Budget for 2018-19 had pegged post-devolution tax collections at Rs 14.81 trillion. A year later, it raised them to Rs 14.84 trillion under revised estimates. However, actual collections were just Rs 13.17 trillion. Now take 2019-20. The Budget Estimates had pegged the collections at Rs 16.49 trillion. Revised Estimates pegged them down at Rs 15.04 trillion. The actual was even lower at Rs 13.56 trillion. This was also the function of a slowing down economy. For instance, the Budget for 2019-20 had assumed nominal GDP growth at 12 per cent. However, actual growth was just 7.2 per cent.

For the current financial year, the Budget had assumed the Centre's tax collections at Rs 16.36 trillion post-devolution. However, that time GDP at current prices was assumed to grow by 10 per cent. A month and a half later, it was clear that the economy would be on a downward spiral for the year. As cited above, the first advance estimates had pegged the economy to contract by 4.2 per cent at current prices this financial year.

In the slowing economy, it is prudent to take tax-GDP ratio of 2019-20 which was 6.67 per cent, to project the tax collections for the current financial year. At that rate, tax collections may turn out to be Rs 12.99 trillion for 2020-21, 4.2 per cent lower than the previous year's. Even this mop up seems ambitious as tax-GDP ratio may fall further in the current financial year.

For the next financial year, it would be prudent to take average tax-GDP ratio of the previous five years to remove cyclical fluctuations. This average comes at 6.97 per cent. At this rate, the Centre's tax collections, post-devolution to the states will turn out to be Rs 15.07 trillion if the economy at current prices grow by 11 per cent and Rs 15.70 trillion if it expands by 15.5 per cent. At the former level, it would be 16.01 per cent higher over the current year's level and at the latter number, it would be 20.86 per cent more than 2020-21's mop up. These tax growth rates seem to be a rarity compared to the recent past, but then GDP has also not grown up to 15.5 per cent in these years.

Experts have a word of caution for the finance ministry on this count. Says Abhishek Rastogi, partner at Khaitan & Co, "The collection targets must be decided keeping in mind the eligible refunds and the new remission scheme so that there is least disruption between the estimated and the actual values."

The government has come out with the Remission of Duties or Taxes on Export Products Scheme that has replaced Merchandise Exports from India scheme from the current month.

Now come to non-tax revenue, which is mainly dividend by PSUs, RBI and revenues from telecom such as license fee and spectrum. This revenue has also dwindled in proportion to GDP in recent years, but got a fillip in 2018-19 and 2019-20. The revenues under this head came down to 1.13 per cent as percentage of GDP in 2017-18 from 1.77 per cent in the previous year and 1.82 per cent in 2015-16. However, the proportion rose to 1.24 per cent in 2018-19 and further to 1.6 per cent in 2019-20. The main reason for this was interim dividend of Rs 28,000 crore by the Reserve Bank of India in 2018-19 and transfer of Rs 1.76 trillion of capital reserves by the central bank in 2019-20.

From this year, the RBI has changed its accounting year to the government of India's financial year (April to March) from earlier July-June. Besides, the government is expected to auction Rs 3.92 trillion worth of airwaves suitable for fourth-generation (4G) mobile networks in March this year.

Because of this, let us assume non-tax revenue to be on higher side of 1.6 per cent of GDP, as in the previous year. That would translate to Rs 3.12 trillion under this head for the current financial year, which would be 4.29 per cent lower than the previous year. If we take average non-tax revenue-to-GDP ratio of the past five years at 1.51 per cent for the next financial year, an 11 per cent nominal GDP growth would give Rs 3.26 trillion under this head and 15.5 per cent growth would yield Rs 3.4 trillion. At the former level, it would be 4.49 per cent higher than what is likely to be collected in the current financial year and almost flat compared to 2019-20 level. However, at Rs 3.4 trillion it would be 8.97 per cent higher than the expected current year's level.

Now, turn to capital receipts, excluding market borrowings. Most important part of this revenue generation is disinvestment.

The government missed its disinvestment targets in the previous year, when it went over-confident by the colletions in the two earlier years. In fact, it surpassed the Budget Estimates in 2017-18 and 2018-19. While it grossed bit over Rs one trillion in FY'18 against the target of Rs 72,500 crore, it mopped up close to Rs 95,000 in FY'19 againt the target of Rs 80,000. This gave the government confidence and it projected disinvetment receipts of Rs 1.05 trillion in 2019-20 but was able to mop up just half of that at Rs 50,304 crore. The government went overboard in the current financial year and pegged the receipts at Rs 2.10 trillion, about Rs 90,000 crore of which was to come from LIC initial public offer and IDBI privatisation.

In fact, the government has not been able to tap the opportunity of rising markets in the current financial year. The two most strategic sales of BPCL and Air India are likely to spill over to the next year, while LIC and IDBI are stuck in legal hassles. The government has been able to garner just Rs 15,220 crore so far. It may get another Rs 2,664 crore from the ongoing SAIL OFS.

On the other hand, if one looks at last year's performance on disinvestment-to-GDP ratio, the Centre should be able to collect Rs 66,000 crore this financial year. There are still one and a half months to go and assuming the government is able to reach at least this amount, average disinvestment-to-GDP ratio of 0.5 per cent should yield Rs 1.08 trillion next year from disinvestment if the economy grows at 11 per cent, and Rs 1.12 trillion if it exapnds by 15.5 per cent.

Adding these components, one would get Rs 16.77 trillion of revenues for the current financial, which would be 13.20 per cent lower than the last year's and 25.33 per cent less than what was projected at the time of the Budget presentation. Next year, it would Rs 19.41 trillion, if the economy rises by 11 per cent and Rs 20.22 trillion if it expands by 15.5 per cent.

This represented 15.74 per cent higher receipts at lower GDP growth and 20.57 per cent more revenues at higher GDP growth.

Expenditure:

This is a bit more tricky than revenues. The reason being that the government is likely to not cut its expenditure in the current financial year compared to what was estimated in the Budget. It rather would increase capex, albeit by at least a small amount of Rs 25,000 crore. Though the government may like to prune revenue expenditure by rationalising subsidies, one cannot go beyond a point as much of the revenue expenditures are committed ones like pension and salaries. Also, the government has already announced additional Rs 65,000 crore of fertilizer subsidy. The government has already increased allocation for MNREGA by Rs 40,000 crore and the government may have to increase it more. Food subsidy has already surpassed the budgeted amount and hence has to be raised. Some portion of higher revenue expenditure may be matched by saving in other departments as always happens.

Because of this, better way to make projetions for expenditure for 2021-22 is to keep revenue expenditure at budgeted level of Rs 26.30 trillion and increase capital expenditure by Rs 25,000 crore over the budgeted amount of Rs 4.12 trillion to make it Rs 4.37 trillion. This would take total expenditure to Rs 30.67 trillion for 2020-21.

The government would have to incur expenditure on Covid vaccination next year. However, the revenue expenditure on other items particularly subsidies may be pruned further. Besides, it would have to stimulate the economy by enhancing capital expenditure with private investments still lacklustre. The government officials do substantiate this point that they will incur extra expenditure next year. If one takes average growth of revenue expenditure in the past five years which comes at 9.96 per cent and apply it for the next year on the base of this year, the outlay under this head would be Rs 28.92 trillion. Applying the same formula of average growth of capital expenditure at 11.97 per cent for the past five years would take the spend under this count to Rs 4.89 trillion. This would give total expenditure of Rs 33.81 trillion. 

Fiscal deficit:

The above fiscal math would give a total fiscal deficit of Rs 13.92 trillion for the current financial year, which is a bit more than Rs 12 trillion of market borrowings pegged for the year. This would put the deficit at 7.1 per cent of GDP inn FY21. For the next financial year, fiscal deficit would be Rs 14.40 trillion if the economy grows at 11 per cent and Rs 13.59 trillion if it grows by 15.5 per cent. That would translate into a fiscal deficit of 6.6 per cent in case of the former growth rate and six per cent in case of the latter growth rate. If the government pursues disinvestment more aggressively and imposes a Covid cess or comes out with Covid bonds, the fiscal deficit would be proportionately that much lower.