The cooling down of the economy could hurt the central government’s fiscal health, a worry accentuated by fresh data on Wednesday (Photo: Reuters)
The cooling down of the economy could hurt the central government’s fiscal health, a worry accentuated by fresh data on Wednesday (Photo: Reuters)

GST shortfall may turn into next worry for the Centre

  • The shortfall could be 40,000 cr, all of which may be borne by the central government, considering that states have been guaranteed 14% annual revenue growth under GST laws
  • Services PMI retreated from 53.8 in July to 52.4 in August, signalling a slower rate of output growth

New Delhi: The sluggish growth in goods and services tax (GST) revenue receipts, unless reversed quickly, could poke a 40,000 crore hole in central government finances by the end of this fiscal, analysts warned on Wednesday, even as a private survey showed India’s services sector growth lost steam in August from a month ago.

An analysis of GST revenue trend Credit Suisse shared on Wednesday said growth in collections in the first five months of the fiscal has been 6.4%, well below the 10% estimated for the year. If this pace is maintained for the full year, the shortfall could be 40,000 crore, all of which may be borne by the central government, considering that states have been guaranteed 14% annual revenue growth under GST laws, the analysis said. The Centre compensates states for their revenue shortfall using collections from a cess on GST imposed on products such as automobiles. GST receipts which had touched 1.13 trillion in April could not sustain that growth subsequently.

“The rules are not clear to us, but if compensation needs exceed (the) cess collected, the extra funds would go out from general fiscal expenses. While this is just a Centre-state allocation issue, it can have a negative growth impact," said the Credit Suisse analysis.

Finance minister Nirmala Sitharaman, who has already announced several steps to improve business confidence and boost growth, on Wednesday consulted infrastructure sector representatives on ways to stimulate growth. The tight fiscal position, however, reduces the government’s headroom for offering fresh sops.

The cooling down of the economy could hurt the central government’s fiscal health, a worry accentuated by fresh data on Wednesday. The services sector, which accounts for more than half of India’s $2.7 trillion economy, lost momentum in August, according to IHS Markit, a market information supplier. The IHS Markit India services business activity index, which tracks 400 businesses across various industries including transport, information, communication, finance, insurance and real estate, retreated from 53.8 in July to 52.4 in August, signalling a slower rate of output growth, the company said in a statement. A reading above 50 indicates expansion.

The survey, which collects data from businesses in the second half of every month, pointed out that all sectors it covered, except realty and business services, showed sustained growth. IHS Markit’s composite PMI output index showed expansion for the 18th month in a row, but at 52.6 in August, the expansion was slower compared to 53.9 in July.

(Graphic: Paras Jain/Mint)
(Graphic: Paras Jain/Mint)

“The weaker PMI readings for India’s service sector match the trend noted in the manufacturing industry, bringing unwelcome news of a cooling economy halfway through the second quarter of FY20," said Pollyanna De Lima, principal economist at IHS Markit. Earlier in the week, IHS Markit survey showed India’s manufacturing output in August grew at the slowest pace in 15 months.

News of slower growth in services sector follows data earlier this week showing eight infrastructure industries slowed to a 2.1% expansion in July, down from a 7.3% growth in the year-ago period. Asia’s third-largest economy expanded 5% in the June quarter, the slowest pace in six years.

Credit Suisse said states received 6.5 trillion in GST revenue in FY19, including central government compensation, which, with a 14% growth, would touch 7.4 trillion in FY20. If this increase of 90,000 crore is not seen in aggregate GST collection, the Centre’s GST take would see a decline in FY20, Credit Suisse said.

Reuters reported, citing unnamed government officials and advisers, that the government may miss its 3.3% fiscal deficit target for the current financial year, despite receiving an additional dividend from the RBI. The gap between receipts and spending, which is met through borrowing, could go up to 3.5% of GDP, the report said.

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