View: Govt may be getting creative to keep up the facade of being fiscally fit
Budget estimates have failed to take into account the massive revenue shortfall of last year.
How is that really possible if the government has a gaping hole of Rs 1.7 trillion in revenue? For the last fiscal, the Union Budget showed an estimated revenue receipt (revised) of Rs 17.3 trillion.
But the actual (provisional) revenue, as per the Controller General of Accounts (CGA) data, was only Rs 15.6 trillion. A shortfall of 0.9% of GDP!
There are only two ways to address this huge fall in revenue: deviate from the path of fiscal prudence, or reduce public spending. You cannot have your cake and eat it too.
If there was no cut in public expenditure, as claimed in the Budget, is the actual fiscal deficit 4.3% of GDP, and not 3.4%? If yes, GoI has not just deviated but gone dangerously off-track on fiscal consolidation. Is the Indian economy hurtling towards ‘a silent fiscal crisis’, to repeat the words of economist Rathin Roy?
Both the Union Budget and the CGA data in the Economic Survey show that the fiscal deficit numbers are on target. So, is the government hiding actual numbers with creative accounting to give the appearance of fiscal prudence, yet continuing on the path of fiscal profligacy?
The total government expenditure, based on CGA data, is less by Rs 1.5 trillion in 2018-19 compared to the revised estimate. One of the biggest cuts has been in the food subsidy bill, which is Rs 0.7 trillion short. Because there is no change in food subsidy policy, GoI cannot reduce its subsidy bill. Instead, it decided to provide for less than half the food subsidy bill in the Budget.
This is not the first time GoI has intentionally under-budgeted for food subsidy. But the gap between the Food Corporation of India’s (FCI) actual subsidy bill and subsidy amount released through the Budget is now at a record high. The Centre’s cumulative dues to FCI are at Rs 1.95 trillion. Instead of providing for these trillions in the Budget, FCI has been asked to take fresh loans from the National Small Savings Fund.
Add the shortfall in food subsidy (as per CGA data) to the Budget, the fiscal deficit in 2018-19 will rise by 0.4% of GDP.
Please Mind the Gap
Apart from this creative accounting of the food subsidy bill, there is still an additional Rs 0.8 trillion shortfall in expenditure.
Often in the past, GoI has taken expenses off the Budget by moving them as loans in the accounts of public sector undertakings (PSUs). If the government has followed the same strategy to meet this shortfall of Rs 0.8 trillion, the real fiscal deficit would rise by another 0.5% of GDP.
What do these numbers portend for the current year? One, roughly Rs 0.9 trillion of the decline in revenue receipt is on account of the shortfall in goods and services tax (GST) collections. In the coming year, GST receipts will rise as the system overcomes the initial glitches.
But if the economy grows less than the targeted 8%, on which the Budget estimates are based, it will surely bring GST collections below target.
Two, given that the Budget estimates for 2019-20 do not take into account the massive revenue shortfall of last year, the FM is hoping for a massive increase in revenue. In reality, new tax initiatives to soak the rich will result in some billionaires leaving the country.
Some will corporatise to benefit from the 17.2% point gap between the corporate and income tax rates. The new tax initiatives will likely incentivise tax avoidance without increasing revenue receipts.
Three, if GDP growth is below target, revenue collections will be lower and fiscal deficit higher.
Without sounding too alarmist, one must caution that the looming fiscal crisis is reminiscent of the 1980s fiscal practices that culminated in the 1991 balance of payments (BoP) crisis.
Then, as now, GoI was spending far beyond its means. Then, as now, GoI spending was crowding out private investment. Then, as now, GoI pursued protectionist policies that increased the cost of imported inputs, making industry uncompetitive for exports.
Then, as to some extent in the current Budget, tax and tariffs rates were not based on sound fiscal principles, but meant to give patronage to various political constituencies. Then, the government was heavily borrowing abroad to meet its expenses and these fiscal practices led the country to its worst BoP crisis.
In the Budget speech, Sitharaman announced the government was contemplating tapping sovereign loans to take advantage of low international interest rates. The question is: how much will the government borrow?
The cost advantage would be small if the borrowed sums are tiny. If the borrowed sums are large, the risk will be enormous. GoI could become addicted to cheap foreign loans to fund its populist programmes, and that could lead to another crisis.
(The writer is professor, social policy, Columbia University, US)