Modi govt confident of meeting fiscal deficit target but faces challenges

The government is confident of meeting the fiscal deficit target for the year and has reiterated that confidence even after the recent excise duty cut on petrol and diesel, which will lead to a total revenue loss of Rs 105 billion. Of this, the Centre will bear about Rs 61 billion, as 42 per cent of the proceeds from duties are passed on to the states. 

While the direct tax collections so far are encouraging, other indicators show the Centre has a formidable task. Going by available trends, there could be a shortfall of more than Rs 1 trillion in its share of the goods and services tax (GST). 

Adding that the estimated additional expenditure of Rs 380 billion, the government will have to raise nearly Rs 1.5 trillion through higher-than-budgeted direct tax proceeds, non-tax revenue and disinvestment, and reduce in non-essential spending, if it has to meet its fiscal deficit target of 3.3 per cent of the gross domestic product. 

“The government is doing a delicate balancing act with slower than anticipated GST collections as well as additional expenditure commitments,” said Saumya Kanti Ghosh, chief economist with State Bank of India. 

The fiscal deficit has already hit 94.7 per cent of the target in the first five months. In absolute terms, it stood at Rs 5.91 trillion. So, in the next seven months, the government will have to contain its excess expenditure over revenues within Rs 330 billion to contain the deficit at the targeted level in absolute terms. The proportion of GDP will vary a bit, depending on GDP numbers. 

Though the fiscal deficit was higher for the same period last year (at 96.1 per cent of last year’s target), there was slippage in the final target, from 3.2 per cent of GDP to 3.5 per cent. Finance Minister Arun Jaitley had claimed that this was due to GST receipts being a month less. However, the government had effected a cut in the actual capital expenditure by as much as 15 per cent compared to the budgeted estimates. 

“It is not an easy target to meet and this is not an easy year to meet that target,” said D K Joshi, chief economist with Crisil. 

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 budgeted fuel subsidy for the year is Rs 250 billion. However, the government could now pay out an additional Rs125 billion for the year on fuel subsidies in light of higher crude oil prices. The government has announced that it will provide a support of Rs 20 billion extra for state-run carrier Air India, over Rs 163 billion announced in the Budget. The outlay for Ayushman Bharat could increase by Rs 35 billion. 

Total expenditure for April-August is Rs 10.7 trillion, compared to Rs 9.5 trillion for year-ago period. This is before most of the additional spending burden is realised. The total budget size this year, before accounting for supplementary demand for grants and additional commitments, is Rs 24.4 trillion. Analysts said the year could end with some cuts in non-essential spending, including capital expenditure for ministries and departments, which have not spent as much as what was allocated to them. 

“If you can’t generate revenue then you have to compress spending. Within expenditure, it is capital spending where you can compress without any short-term ill effects,” Crisil’s Joshi said.

“The Centre may still look at cutting back capital expenditure. The government may review the capex of the ministries that have not spent to explore a cut back in capital expenditure eventually. It’s critical to adhere to fiscal targets,” said Shubhada Rao, chief economist, YES Bank. “We need to expedite disinvestment. The situation will be contingent upon the GST revenue picking up in the second half of the year,” Rao said. 

For the April-August period, the central GST has totaled Rs 1.8 trillion. As per data available on the website of the Controller General of Accounts, the highest was Rs 579 billion for the month of July, and the lowest was Rs 281 billion in May. The average GST that CGST has raked in for the five months of this fiscal year is around Rs 370 billion.