Meeting a target

The government's fiscal consolidation efforts may result in a squeeze on its capital expenditure

Will the Union government be able to meet its revised fiscal deficit target of 3.4 per cent of gross domestic product (GDP) for 2018-19? Legitimate doubts have been expressed in view of the latest numbers released by the Controller General of Accounts for the first 10 months of the current financial year. 

According to these numbers, the fiscal deficit in the April-January period of 2018-19 has already risen to a level equivalent to 121 per cent of the revised estimates given in the interim Budget presented on February 1. This means that the fiscal deficit has already crossed Rs 7.71 trillion in the first 10 months of the year and the government will need a fiscal surplus of Rs 1.37 trillion in the remaining two months to reach the revised annual target of Rs 6.34 trillion. 

How difficult will it be for the government? Let the numbers speak for themselves. It will be useful to start the exercise by understanding the monthly trend of revenue receipts, which are more than two-thirds of the entire Budget size.

In 2017-18, the first 10 months had seen a collection of around 76 per cent of the total revenue receipts during the entire year. In other words, as much as 24 per cent of the total revenue receipts came in during the last two months of the year. Similarly, for net tax revenues for the Centre, which is a component of the total revenue receipts, the months of February and March accounted for about 22 per cent of the annual figure in 2017-18.

Assume for a moment that in 2018-19 also, the last two months of the year would mobilise the revenues at least at the same rate as last year. But the problem is that even if they do, the shortfall in meeting the revised revenue receipt targets would be as much as Rs 1.33 trillion. This shortfall can be wiped out only if the government manages to garner as much as 32 per cent of the full year’s revenue receipts in just the last two months, which is extremely unlikely. 

What could the government do? On the capital side, disinvestment receipts are doing well, even though critics will always question its quality as it has now become a mere instrument for transferring resources to meet the government’s deficit. By the end of January, disinvestment receipts had reached Rs 35,606 crore against an annual target of Rs 80,000 crore. In February, Rs 20,867 crore of more disinvestment was completed, taking the total figure to Rs 56,473 crore. Another Rs 23,527 crore of disinvestments will have to be achieved in March, which is not an impossible target given the government’s record in 2017-18, when in February and March alone the disinvestment receipts amounted to Rs 44,652 crore.

The focus, therefore, will have to be on expenditure if the government wants to meet the revised fiscal deficit target. There is not much leeway in the government’s revenue expenditure. On major subsidies, where there is always scope for deferment, there is very little flexibility now. In the first 10 months of 2018-19, expenditure under major subsidies is estimated at Rs 2.59 trillion and the full year’s expenditure under the revised estimate is Rs 2.66 trillion. The last two months, therefore, will see hardly any subsidy disbursement as the government has already squeezed this expenditure head. 

What can bail out the government is its capital expenditure. If that happens, it will be unfortunate. The squeeze on capital expenditure has already begun. Thus, by the end of January 2019, the government’s capital expenditure is estimated at Rs 2.29 trillion. The interim Budget’s revised estimates had provided Rs 3.16 trillion for the full year. Most likely, the government will not be able to use up the entire remaining allocations of Rs 87,000 crore in the remaining two months.

It is even likely that the government might use the entire unspent amount under capital expenditure to bridge part of the Rs 1.33-trillion revenue receipts shortfall. Remember that last year the government actually pulled back about Rs 33,000 crore of capital expenditure in the month of March 2018. Thus, the government’s capital expenditure till February 2018 was Rs 2.97 trillion, but it fell to Rs 2.64 trillion by the end of March 2018. 

The increase in the nominal size of the Indian economy to Rs 190 trillion for 2018-19, compared to Rs 188 trillion earlier, will also give a fiscal deficit cushion of about Rs 6,000 crore. With a little bit of extra push to mobilise more tax revenues and curtail capital expenditure, the government might still manage to stick to the revised fiscal deficit number. But critics will always question the quality of such fiscal consolidation efforts.