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The long shadow of FY20 on Centre's finances can not be missed by anybody

There may be no official word yet on how the Centre's tax revenue assumptions for the current year have gone awry

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A K Bhattacharya
7 min read Last Updated : Apr 08 2020 | 7:33 AM IST
Just about a week into the new financial year, there is now more clarity on the enormity of the challenges the government will face with regard to its revenue mobilisation efforts during 2020-21. The challenge will arise not only from the adverse impact of Covid-19 on the economy, but also from a huge overestimation of revenue collections during 2019-20.

First, let the revenue collection performance in 2019-20 be placed in the context of the Budget that was presented on February 1, 2020. Gross tax revenue collections during 2019-20 were expected to be about Rs 21.63 trillion in the Revised Estimate (RE). But it is now becoming clear that the actual gross tax revenue numbers for last year would not be more than Rs 19.62 trillion. In other words, the shortfall in gross tax revenue would be about Rs 2 trillion.

Of course, the shortfall estimate is based partly on an assessment of the reported revenue collection figures and partly on the trend of collections seen in the first 11 months of 2019-20. But there is no reason to doubt the extent of the revenue shortfall.
Direct tax collections (including corporation tax and income tax) for the full year are reported to be only  Rs 10.27 trillion, compared to the RE figure of Rs 11.7 trillion — a shortfall of Rs 1.43 trillion. Collections of the central goods and services tax (CGST) for the full year are estimated at Rs 4.95 trillion, down from the RE number of Rs 5.14 trillion. This will mean a shortfall of Rs 19,000 crore. GST Compensation Cess collections too have fallen short of the RE figure by about Rs 2,500 crore.

Customs collections and excise duties in the April-February period of 2019-20 were estimated at Rs 1.05 trillion and Rs 1.97 trillion, respectively, according to the provisional unaudited numbers released by the government. The month of March has seen a huge drop in consumption of petroleum products (which account for the bulk of excise revenue) and even in imports, thanks to the disruption caused by the Covid-19 outbreak.
 
Assuming that Customs and excise collections in March continued to maintain the same pace witnessed in February, the full year’s collections would not be more than Rs 1.15 trillion and Rs 2.19 trillion, respectively. Thus, the Customs shortfall would be at least Rs 10,000 crore and the excise shortfall would be another Rs 29,000 crore.

If you add the shortfall in disinvestment receipts (about Rs 50,000 crore, compared to the RE number of Rs 65,000 crore), the total impact on the fiscal deficit would be as high as Rs 2.18 trillion or a little over 1 per cent of gross domestic product (GDP). But its impact on the Centre’s headline fiscal deficit number may be a little less than that.
 
That is because there will be some savings in the government’s expenditure. This will help reduce the slippage in the fiscal deficit. Also, the government will have the cushion of meeting some of its expenditure with extra-Budget borrowing. And more importantly, only 70 per cent of the tax shortfall will have to be borne by the Union government.

Note that as much as 30 per cent of the gross tax collections last year were transferred to the states under the devolution formula, mandated by the Fourteenth Finance Commission. If there is a decline compared to the actual collections, the Centre will lose only 70 per cent of the shortfall amount or about Rs 1.5 trillion and the burden of the remaining shortfall amount would be borne by the states.

Thus, not just the Centre, but the states too would be adversely impacted by a record shortfall in revenue collections in 2019-20. In a worst-case scenario, with no expenditure savings or no additional extra-Budget borrowing, the Centre’s fiscal deficit in 2019-20 may widen by 0.7 percentage point and the actual deficit may end up being 4.5 per cent of GDP, instead of the RE figure of 3.8 per cent.

The fiscal consolidation efforts of most states in 2019-20 will also take a big hit. As many as 12 states had projected a fiscal deficit of more than 3 per cent of gross state domestic product (GSDP) for 2019-20. It is now certain that they will suffer from a larger slippage and many of those 19 states that had promised to stay within the 3 per cent mark may follow their footsteps and report a higher deficit.

But that should not be the only cause for concern. The bigger worry should be the impact of the tax revenue collections shortfall in 2019-20 on the revenue assumptions for 2020-21. As explained earlier, a nominal revenue collection growth rate of 12 per cent has become a highly ambitious and unrealistic target as the Covid-19 outbreak dashes hopes of a nominal growth rate of 10 per cent during 2020-21.

Now with lower gross tax revenue collections of Rs 19.62 trillion in 2019-20, the Budget target of Rs 24.23 trillion of tax revenues in 2020-21 implies a growth rate of over 23 per cent, almost double the rate that was projected at the time of presenting the Budget in February. A growth rate of 23 per cent has been exceeded only thrice in the last 30 years — in 2006-07, 2007-08 and 2010-11. It is unlikely that such a feat can be achieved in a year when the economy will have to weather the full impact of Covid-19.

Assume that the nominal growth rate in 2020-21 will be no higher than the 7.5 per cent growth achieved in 2019-20 and the tax buoyancy rate continues to be 1.2 as projected for the current year. Both the parameters — of growth and tax buoyancy — will not look rea­listic in the current situation. But even on the basis of these assumptions, the projected tax buoyancy rate would go up to 1.6, which will be a difficult target to meet in a year of economic slowdown. On the other ha­nd, the impracticality of achieving a 223 per cent rise in disinvestment receipts this year will make the government’s fiscal deficit target even more unrealisable.

It is not that the Union government is unaware of a likely drop in the revenue collections for itself and for the states. It’s true it has not changed the schedule of its overall borrowing programme for the current year. But already, to help tide over the stress in government finances in the wake of lower growth in revenue collections or an increase in expenditure, the Reserve Bank of India (RBI) has increased the Ways and Means Advances limit in the first half of the current year by 60 per cent for the Centre and by 30 per cent for the states.

Ways and Means Advances (WMA) are an instrument to help the Centre and the states to overcome temporary mismatches in their revenue and expenditure. But the RBI has already stated that it would consider issuing bonds if the Centre used up 75 per cent of its WMA limit. And the Centre can always step up its borrowing if the need arises.

There may be no official word yet on how the Centre’s tax revenue assumptions for the current year have gone awry. But the long shadow of Covid-19, made longer by the revenue shortfall in 2019-20, on the Centre’s finances in 2020-21 can no longer be missed by anybody.

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Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

Topics :CoronavirusLockdownReserve Bank of IndiaGross domestic productFinance Commission15th Finance CommissionGSTGST collectionGST cessIndia economy

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