Budgetnomics 101: Massaging the fiscal deficit8 min read . Updated: 29 Jan 2019, 12:27 AM IST
Spending has shot through the roof and revenues are down. How on earth will government meet its fiscal deficit target of 3.3% of GDP?
One of the closely watched figures in the interim budget to be presented later this week (on 1 February, 2019), by the new finance minister, Piyush Goyal, will be the fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
While presenting the budget for the current financial year (2018-19) in February 2018, the then finance minister, Arun Jaitley, had hoped to achieve a fiscal deficit of ₹6,24,276 crore or 3.3% of the gross domestic product (GDP). Between April and November 2018, the government had already run a fiscal deficit of ₹7,16,625 crore or 114.8% of the fiscal deficit target that the government had hoped to achieve.
One of the major reasons as to why the actual fiscal deficit has gone totally out of whack lies in the fact that the government hasn’t been able to earn as much goods and services (GST) tax, as it had hoped to.
Take a look at Chart 2, which basically plots the month on month central GST collections. The government had hoped to earn a total central GST of ₹6,03,900 crore. Between April and December 2018, the first nine months of the current financial year, the government had actually earned a central GST of ₹3,41,146 crore or 56.5% of the yearly target. At this rate of collection, the government will end a little over ₹1,49,000 crore short of the target. And that is a huge number.
Why have the central GST collections been so underwhelming? A major reason for this lies in the fact that many people who should be paying GST, aren’t doing so. This can be gauged from Chart 3, which shows that the proportion of taxpayers not filing their GST returns has been going up since the tax was launched. Of course, during the period, the number of taxpayers has also gone up, but so has the proportion of people not filing their GST return. Taxpayers not filing their GST return is a reasonably good indicator for those not paying their fair share of GST as well.
During the course of the financial year, the GST council has tried to tackle this by cutting the GST rates. It reduced tax rates first in July and then again in December. The GST council’s interpretation of the problem seems to be that it is the higher tax rates have been keeping people away from paying the tax. The problem is that along with the higher tax rates it is also the complicatedness of the entire exercise that is to be blamed.
As Madan Sabnavis, chief economist of CARE Ratings, said in a recent note: “The GST collections are expected to moderate in the coming months with the Council’s announcement of reduction in GST rates." The point being that between January and March 2019, the government isn’t going able to make up for the GST gap that persists. While, lower rates, along with a simple GST will help in the long-term, it is going to have its implications during the course of this year.
In 2018-2019, the government had hoped to earn ₹80,000 crore through disinvestment; that is by selling shares of public sector enterprises to the general public, or getting one public sector unit to buy another.
If we look at the data put out by the Controller General of Accounts (CGA), between April and November 2018, the government had earned ₹15,810 crore, through the disinvestment route. A gap of close to ₹64,000 crore remains.
A part of this gap will be filled by the government selling 52.63% of its stake in REC (formerly Rural Electrification Corporation Ltd).
The government is also expected to benefit from public sector enterprises buying back their shares. But even with this, it will be difficult for the government to achieve a disinvestment target of ₹80,000 crore, given the market volatility that prevails.
Also, the question remains that whether what the government calls disinvestment, is really disinvestment.
Let’s take last financial year’s case of ONCG buying HPCL. The former had to borrow money, in order to pay for HPCL. If the government hadn’t pushed this deal through, it wouldn’t have benefitted to the extent that it did and its borrowing would have gone up. But what went up instead was the borrowing of ONGC.
Essentially, what should have been the borrowing of the government to fund its expenditure, ended up on the books of ONGC. Further, when one government company buys another, the overall control as well ownership of the government over these companies, doesn’t really come down. So, what sort of a disinvestment is this?
The taxes on petrol and diesel
Over the years, excise duty on petrol and diesel has become a huge source of revenue for the government. Take a look at Chart 1. In 2013-14, the total excise duty collected was around ₹46,386 crore. By 2017-18, this had jumped to ₹2,23,922 crore. This was primarily because the excise duty on per litre of petrol and diesel has been increased during that period.
During 2018-19, the government had hoped to earn around ₹2,43,000 crore through excise duties.
For the first six months of the financial year between April and September 2018, the government had earned only 29.6% of what it hoped to earn during the course of the year.
Also, with the government reducing excise duties on both petrol and diesel, it remains to be seen how much more will the government end up collecting in the second half of the year.
The public sector banks
As is well known, the public sector banks in India have been batting with the problem of bad loans. These are loans which haven’t been repaid for a period of 90 days or more. There has been some improvement on this front. As of March 2018, the bad loans of these banks had stood at ₹8.96 trillion. By September 2018, it had fallen to ₹8.69 trillion. Even with this, the improvement hasn’t been as much as the government was expecting.
When the budget was presented last year, the government had allocated ₹65,000 crore to recapitalise these banks during this financial year. The government will now put in ₹1,06,000 crore to recapitalise these banks, a jump of ₹41,000 crore, which will put pressure on the expenditure of the government and hence, its fiscal deficit.
The government has been recapitalising public sector banks to keep them going over the years. Between April 2013 and by the end of March 2019, the government will have invested a total of ₹2,71,367 crore in total.
What will help is the fact that the government has sold off its worst performing bank IDBI Bank, which had a bad loans rate of 31.8% as of September 2018, to the Life Insurance Corporation (LIC) of India. Up until now, it was the responsibility of the government to keep bailing out the troubled bank, by putting in extra capital regularly. Now it’s the responsibility of LIC to keep bailing out IDBI Bank, which basically means the policyholders of India’s largest insurance company.
The road ahead
What should the government do in such a situation? In a normal situation the government could have cut expenditure on other fronts to meet its fiscal deficit target. This becomes difficult given that Lok Sabha elections are due in a few months’ time. In this scenario, the government will do what several finance ministers in the past have done.
The government’s accounting works on a cash basis. This basically means that unless a payment has been made, it doesn’t get reflected as an expenditure, even if that payment is due. The government basically uses this technicality to ensure that its fiscal deficit remains on target or does not go up dramatically. Let’s understand this in more detail through the example of the Food Corporation of India (FCI).
FCI buys rice and wheat directly from farmers at the minimum support price announced by the government. It then sells this rice and wheat through the shops of the public distribution system, at a fairly subsidised price. In the process, it loses money.
Hence, in order to ensure that FCI continues operating, the government needs to compensate it for these losses.
The government, instead of paying FCI in a year where the payment is due, can delay the payment to the next financial year. In this situation, given that no money would have left government coffers, no expenditure is incurred. The subsidies that should have been paid but are not, are referred to as a carryover liability.
Governments, in the past, have done this all the time.
In fact, the Comptroller and Auditor General (CAG) pointed this out in a recent report. In 2016-17, the FCI was paid ₹78,335 crore, for food subsidies. At the same time, its carryover liability stood at a massive ₹81,303 crore. This is the additional amount that the government owed FCI and chose not to pay. Of course, this amount has been going up over the years.
The carryover liability will only go up, as the government looks to control the fiscal deficit. Having said this, the scope to do this is rather limited this year. The government had allocated ₹1,69,323 crore towards food subsidy for this financial year. Of this amount, around ₹1,42,458 crore or 84% of the total, had already been spent between April to November 2018. There is a limited scope here to cut expenditure.
As the CAG report referred to earlier in the piece, points out: “In order to cover financial requirements arising out of the subsidy arrears, FCI resorts to a number of methods in different years such as Bonds ( ₹13,000 crore), unsecured short term loans ( ₹40,000 crore), National Small Saving Funds (NSSF) Loans ( ₹70,000 crore) etc… Besides, Cash Credit Facility guaranteed by Government of India with consortium of 68 banks ( ₹54,495 crore) also remains available with FCI. Government regularly extends this guarantee."
Of course, all this borrowing comes with a certain cost (the interest that needs to be paid on it) and the cost for this has to be ultimately borne by the government.
The payment of fertilizer subsidies will work along similar lines.
To conclude, under these circumstances, it will be very difficult for the government to meet its fiscal deficit target of 3.3% of the GDP. Sabnavis expects it to be around 3.5% of the GDP, which works out to ₹6,59,426 crore. It could be even higher, given that we are just a couple of months away from the Lok Sabha elections.
Vivek Kaul is the author of the Easy Money trilogy.