High spending widens deficit

High spending widens deficit

The central government’s aggregate gross tax collections growth decelerated to 6.6% year-on-year (y-o-y) in September from 22.2% y-o-y in August. Personal income-tax collections growth was strong at 28.5% y-o-y, but corporate income tax (0.1% y-o-y), excise duties (-0.1%) and customs tax (2.8%) were extremely weak.

Other tax collections (primarily service taxes) which account for about 10-12% of overall tax revenues grew at a strong rate of 32.6% y-o-y in September.

Also See | Dismal outlook (PDF)

Similarly, growth in net tax collections (after transfer of share of state governments) was 4.1% year-to-date (YTD) compared with a budget estimate of 24% y-o-y.

Total non-tax revenue declined by 43% y-o-y in September as compared with 22.6% decline in August. On a FYTD basis, non-tax revenue was weaker by 69.2% y-o-y.

A combination of deceleration in tax revenue growth and sharp decline in non-tax revenues led to a decline in total revenue receipts by 2% y-o-y in September compared with a decline of 1.7% in August.

On a FYTD basis, they fell by 26.2% y-o-y compared with BE of 1%. BE is government budget estimates as indicated in the Budget document released in February.

Total expenditure accelerated by 31.7% y-o-y in September compared with a decline of 15.6% y-o-y in August. Total expenditure growth in April-September was up 9.9% y-o-y compared with 19.9% in April-September 2010. Revenue expenditure grew 9.8% on a FYTD basis compared with BE of 4.1% YoY.

On a FYTD basis, fiscal deficit as a percentage of BE is at 70.8% (April-September) compared with 34.9% in April-September 2010. Cumulative fiscal deficit is at 3.1% of the gross domestic product or GDP FYTD (versus the budget estimate of 4.6% of GDP for full year).

Compared with 2011, we believe the government will have a major challenge on the revenue side for four reasons. One, absence of the one-off 3G and BWA licence fees (1.5% of GDP). Two, revenue loss from reduction in customs and excise duties on petroleum products (0.5% of GDP). Three, slowdown in tax revenues in the second half of the financial year due to deceleration GDP growth. Four, lower than budgeted collection from divestment of state-owned enterprises.

Consequently, it will be imperative for the government to reduce its expenditure to GDP to achieve its BE for the fiscal deficit of 4.6% of GDP.

Graphic by Yogesh Kumar/Mint

Edited excerpts from a report by Morgan Stanley. Send your comments at mintmoney@livemint.com.