 "Budget 2016: One-time receipts have kept revenue growth steady for years")
The government has in the past 10 years managed to keep the momentum of revenue growth steady, thanks to one-time gifts each year, shows a piece of data that Finance Minister Arun Jaitley is unlikely to find from his Budget officers.
These gifts have hidden the rise in public debt as a percentage of the government’s core revenue. Over the past 10 years, each year, there has been average annual growth of more than 40 per cent in debt measured against tax and what one can call long-term non-tax revenue.
Since there is little scope for fresh gifts in 2016-17, the minister can face a very difficult fiscal maths this time.
The tendency to use one-off receipts or gifts to cover up low rise in taxes has been a long-standing one with the central government. But it seems to have run its course. So, in 2016-17, unless Jaitley can create something afresh, those gifts will not arrive. At the same time, he faces a much larger demand for higher expenditure. The payouts include those to implement the recommendations of the 7th Pay Commission and support banks and states in financing the power sector restructuring plan, UDAY.
There’s some difficulty he faces. From the annual Budget papers, when one nets out the effect of the one-off receipts, the aggregate receipts of the government fall off dramatically. For instance, in 2015-16, the accretion to debt as percentage of total receipts is nearly 35 per cent. But when one nets out the benefit of the one-time inflow, it climbs to about 38 per cent. In 2014-15, for which the accounts are firmed up and are, therefore, more accurate, the difference is even higher. Minus the one-time flow, it is 43 per cent, even as the Budget papers show those at 36 per cent.
In 2011-12, the difference between the stated position and the actual one was even higher. The reality was 57.2 per cent, compared with 44.4 per cent on paper.
The differences are, therefore, not the creation of this government alone. Stretching back right up to 2005-06, one can see that the governments of the day used the one-time flows from various sectors to make up for their tax sluggishness. Netting out these inflows, the core earnings of the Union government would be far more conservative.
These flows have given successive finance ministers the assurance that they can borrow more without breaching the fiscal discipline imposed by the Fiscal Responsibility and Budget Management (FRBM) Act. “Without those one-time receipts, the deficits would have been higher. Given slow growth of the economy and the consequent shrinking of the revenue base, the receipts actually helped,” says Pinaki Chakraborty, professor at the National Institute of Public Finance and Policy.
What has gone unnoticed is, therefore, the rise in public debt as a percentage of core earnings of the government. It is an insidious weakness eating into the government finances and can blow up very suddenly.
Once the rise in debt becomes a problem, its effect could ripple through the economy. At the receiving end of the crowding-out effect are not only companies but will also be the state governments that have recently been allowed larger access to markets, including foreign investors to borrow from. Their interest cost will rise. To keep the debt from roiling the markets, the government has to turn to higher taxation measures or try to roll them over. The numbers are closer to the limits mandated by the FRBM than they appear from a reading of the government Budget documents.
Sajjid Chinoy, chief India economist and executive director, JPMorgan, agreed these trends needed to be studied carefully for their impact on the bond markets.
Using higher taxation to pay off larger debt or scrounging around for fresh one-time sources worsens public finance even more. Further, there is the factor of higher interest payments as a part of debt servicing. High levels of government debt, therefore, saddle future generations with no offsetting multiplier to gross domestic product from government spending, since the spending has occurred years early, when the debt was issued.
These gifts have hidden the rise in public debt as a percentage of the government’s core revenue. Over the past 10 years, each year, there has been average annual growth of more than 40 per cent in debt measured against tax and what one can call long-term non-tax revenue.
Since there is little scope for fresh gifts in 2016-17, the minister can face a very difficult fiscal maths this time.
The tendency to use one-off receipts or gifts to cover up low rise in taxes has been a long-standing one with the central government. But it seems to have run its course. So, in 2016-17, unless Jaitley can create something afresh, those gifts will not arrive. At the same time, he faces a much larger demand for higher expenditure. The payouts include those to implement the recommendations of the 7th Pay Commission and support banks and states in financing the power sector restructuring plan, UDAY.
There’s some difficulty he faces. From the annual Budget papers, when one nets out the effect of the one-off receipts, the aggregate receipts of the government fall off dramatically. For instance, in 2015-16, the accretion to debt as percentage of total receipts is nearly 35 per cent. But when one nets out the benefit of the one-time inflow, it climbs to about 38 per cent. In 2014-15, for which the accounts are firmed up and are, therefore, more accurate, the difference is even higher. Minus the one-time flow, it is 43 per cent, even as the Budget papers show those at 36 per cent.
In 2011-12, the difference between the stated position and the actual one was even higher. The reality was 57.2 per cent, compared with 44.4 per cent on paper.
The differences are, therefore, not the creation of this government alone. Stretching back right up to 2005-06, one can see that the governments of the day used the one-time flows from various sectors to make up for their tax sluggishness. Netting out these inflows, the core earnings of the Union government would be far more conservative.
| Year | Tax revenue | Non-tax revenue | Non-debt capital receipts | Of which one-off items | Net non-tax receipts* | Net receipts (tax+net non tax)* | |
| FY05 | 304958 | 81193 | 65656 | 61565 | recoveries frm states including Rs 32,665 crore of securities issued to NSSF | ||
| FY06 | 366151 | 76813 | 14056 | 2356 | 88513 | 454664 | |
| disinvestment | |||||||
| FY07 | 473512 | 83205 | 5978.58 | 89183.58 | 562695.58 | ||
| No disinvestment | |||||||
| FY08 | 593147 | 102317 | 40622.8 | 36125.4 | 106814.4 | 699961.4 | |
| disinvestment including RBI sale of SBI to GOI | |||||||
| FY09 | 605299 | 96940 | 12264.8 | 2566.51 | 106638.3 | 711937.3 | |
| including Rs 899 cr as SUUTI disinvestment | |||||||
| FY10 | 624528 | 116275 | 33194 | 24581 | 113734.3 | 738262.3 | |
| disinvestment | |||||||
| 11153.7 | |||||||
| interest frm states--13th FC debt consolidation | |||||||
| FY11 | 793071.72 | 218602.2 | 35265.59 | 22846.1 | 110474.1 | 903545.84 | |
| disinvestment | |||||||
| 120548 | |||||||
| telecom auction | |||||||
| FY12 | 889176.36 | 121672.3 | 36397.95 | 18087.6 | 122581.7 | 1011758.1 | |
| disinvestment | |||||||
| 17400.9 | |||||||
| telecom licence | |||||||
| FY13 | 1036234.3 | 137354.4 | 40949.39 | 25889.8 | 133512 | 1169746.3 | |
| disinvestment | |||||||
| 18902 | |||||||
| telecom | |||||||
| FY14 | 1138733.7 | 198869.7 | 41864.53 | 29367.9 | 171252.6 | 1309986.3 | |
| disinvestment | |||||||
| 40113.8 | |||||||
| telecom auction | |||||||
| FY15 | 1251391.2 | 196959 | 42235.82 | 31350 | 164683.1 | 1416074.3 | |
| disinvestment | |||||||
| 43161.7 | |||||||
| telecom auction | |||||||
| FY16 | 1449490.6 | 221732.6 | 80252.83 | 69500 | 189619.8 | 1639110.4 | |
| disinvestment | |||||||
| 42865.6 | |||||||
Source: GOI budget papers
All figures in Rs crore
*Derived from the tables
These flows have given successive finance ministers the assurance that they can borrow more without breaching the fiscal discipline imposed by the Fiscal Responsibility and Budget Management (FRBM) Act. “Without those one-time receipts, the deficits would have been higher. Given slow growth of the economy and the consequent shrinking of the revenue base, the receipts actually helped,” says Pinaki Chakraborty, professor at the National Institute of Public Finance and Policy.
What has gone unnoticed is, therefore, the rise in public debt as a percentage of core earnings of the government. It is an insidious weakness eating into the government finances and can blow up very suddenly.
| Year | Total receipts (TR) | Accretion to debt | % of Total Receipts | Net receipts* | % of net receipts |
| FY06 | 526626 | 454664 | |||
| FY07 | 578869 | 278451 | 48.1 | 562695.6 | 49.49 |
| FY08 | 727557 | 298829 | 41.07 | 699961.4 | 42.7 |
| FY09 | 883956 | 322053 | 36.43 | 711937.3 | 45.24 |
| FY10 | 1024487 | 356728 | 34.82 | 738262.3 | 48.32 |
| FY11 | 1197328 | 422568 | 35.29 | 903545.8 | 46.77 |
| FY12 | 1304365 | 578478 | 44.35 | 1011758 | 57.17 |
| FY13 | 1410372 | 553340 | 39.23 | 1169746 | 47.3 |
| FY14 | 1559447 | 599589 | 38.45 | 1309986 | 45.77 |
| FY15 | 1681158 | 608673 | 36.21 | 1416074 | 42.98 |
| FY16 | 1777477 | 616137 | 34.66 | 1639110 | 37.59 |
Source: GOI budget papers
*Net Receipts is net of one-off items
All figures in Rs crore
Once the rise in debt becomes a problem, its effect could ripple through the economy. At the receiving end of the crowding-out effect are not only companies but will also be the state governments that have recently been allowed larger access to markets, including foreign investors to borrow from. Their interest cost will rise. To keep the debt from roiling the markets, the government has to turn to higher taxation measures or try to roll them over. The numbers are closer to the limits mandated by the FRBM than they appear from a reading of the government Budget documents.
Sajjid Chinoy, chief India economist and executive director, JPMorgan, agreed these trends needed to be studied carefully for their impact on the bond markets.
Using higher taxation to pay off larger debt or scrounging around for fresh one-time sources worsens public finance even more. Further, there is the factor of higher interest payments as a part of debt servicing. High levels of government debt, therefore, saddle future generations with no offsetting multiplier to gross domestic product from government spending, since the spending has occurred years early, when the debt was issued.