How deep is India's fiscal hole?
Taking into account a likely shortfall in revenue and off-budget spending, the real fiscal deficit could be as high as 5.5% of GDP in the current fiscal
PremiumMumbai: As India’s economic slowdown has intensified, so has the debate on whether the government should stick to fiscal consolidation or run a higher deficit to push growth in the upcoming budget, due on 1 February.
However, data on revenue available so far suggests that the government has very little fiscal space for any significant growth stimulus. If the government’s off-budget liabilities (or withheld payments) are taken into account, the central government’s real fiscal deficit could end up being as high as 5.5% of gross domestic product (GDP) in the current fiscal year, a Mint analysis of public accounts suggests.
This is significantly higher than what the last budget, presented in July, had projected (3.3%) and significantly above the fiscal deficit threshold mandated by law.
The spike in the deficit numbers is largely on account of a pronounced slowdown in revenue. As the economy has slowed, so have tax collections. In the first eight months of 2019-20, the government collected ₹9.83 trillion in total revenue (tax and non-tax), which is 50.1% of the target for the full year. This included ₹7.5 trillion in tax receipts, about 45% of the target for the full year. Non-tax revenue collections was ₹2.32 trillion during the period.
An analysis of revenue data for the past decade shows that on an average, 53% of total revenue collections are made by November. Going by that trend, total revenue receipts this year should at best be close to ₹18.4 trillion, falling short of the budgeted ₹19.6 trillion by ₹1.2 trillion.
On top of that, disinvestment receipts are likely to fall short of the target this fiscal year.
“If the market is favourable, we may be able to meet about 60% of the disinvestment target this year," said a finance ministry official on condition of anonymity. “It needs to be seen how exuberant the market is after the budget."
This means the shortfall in disinvestment receipts could be about 40%, or about ₹42,000 crore. So far, the government has achieved less than 20% of the disinvestment target.
Such a shortfall in revenue collections would push the fiscal deficit to 4.2% of the estimated GDP. This is even after taking into account the windfall gains in non-tax revenue, following the transfer of surplus reserves from the Reserve Bank of India (RBI), and even without accounting for any of the government’s off-budget liabilities.
If the government’s off-budget liabilities in the form of National Small Savings Fund (NSSF) loans to public entities and government-serviced bonds are assumed to be the same in the current fiscal year as in the previous fiscal year, the ‘real’ deficit number would shoot up to 5.5%.
The bottom line: unless the government pulls back spending sharply in the last (ongoing) quarter, we are about to witness a major fiscal slip this year. Little wonder then that the bond markets are on the edge, and RBI has to launch successive ‘twist’ operations to try and bring down yields of long-dated government securities.
One of the biggest off-budget liabilities relates to unpaid food subsidy bills to the Food Corporation of India (FCI), which has been repeatedly forced to avail NSSF loans to run its operations since the government has been unable to keep its payment commitments, leaving the state-run firm cash-strapped.
Under the government’s cash accounting system, deferred payments are not considered as expenses, and the government has taken advantage of it to defer payments to one of its ‘own’ firms.
In fiscal 2020, the carryover liability bill due to FCI is likely to cross ₹2 trillion, data from FCI shows. Data also shows that the budgeted expenditure on food subsidy to FCI in the current fiscal is likely to be short of the subsidy expenditure incurred by FCI by about ₹29,928 crore.
More worryingly, the entire budgeted food subsidy payment to FCI is likely to be used to settle past dues and none of it would accrue to subsidy payments incurred by FCI in this fiscal. This was also true of the past two fiscal years. As a result, the carryover liability bill has surged in recent years.
It remains to be seen whether at a time of severe fiscal stress, the hallowed tradition of kicking the can down the road will be abandoned this year.
Dressing up the numbers would, however, mean that the budget numbers will continue to face questions from the bond markets, as former finance secretary Subhash Chandra Garg has argued. According to Garg’s estimates, the true fiscal deficit numbers have been consistently higher than the reported numbers over the past few years.
Garg’s estimates are marginally lower (5% for fiscal 2020) compared with our calculations as he anticipates a marginal cut in spending. Besides, his off-budget liability estimates do not include NSSF loans to public entities other than FCI.
However, as these pages have highlighted earlier, the role of NSSF in picking the burden of the government’s spending commitments is not limited to subsidy bills.
Loans extended by NSSF to public sector entities such as FCI, NHAI, and IRFC account for a significant chunk of public sector capital spending in recent years. While this is partly because of a surplus of funds left in the account due to lower borrowings by state governments, this has allowed the Union government to withhold any capital infusion in these firms, and instead dump its liabilities on their books so as to report more presentable deficit numbers.
Apart from such liabilities, there are other commitments of the government that threaten its fiscal position. With state goods and service tax (SGST) collections also taking a hit, the compensation cess collections of the government are now falling short of compensation requirement of states. Data presented in the recent GST council meeting shows the compensation cess gap is likely to be as much as ₹63,200 crore in FY20.
Although the government may be able to make use of the surplus cess collections accumulated in the past two years, it is likely to still fall short of the total requirement, and may have to dip into its own coffers to make up for any such shortfall.
We may be in for a prolonged period of fiscal stress now.
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