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Why the FY20 fiscal targets are a long stretch for Modi 2.0 govt

In the 2019-20 interim budget, the then interim Finance Minister Piyush Goyal had announced that the fiscal deficit target for the current fiscal year has been targeted at 3.4 per cent of gross domestic product. This in itself was a deviation from the earlier fiscal roadmap, which had forecast fiscal deficit at 3.1 per cent of GDP.

However, given the disappointing tax collections in 2018-19, which will impact the collections for 2019-20 in terms of revenue growth required, and higher expenditure commitments than targeted in the interim budget mean that the fiscal deficit target for 2019-20 may be a step too far for the Narendra Modi government in its second term.

In the 2019-20 interim budget, the Centre had budgeted revenue receipts of Rs 19.77 trillion, of which net tax revenue projections are Rs 17.05 trillion. Total expenditure for the current year is budgeted at Rs 27.84 trillion, of which revenue expenditure is projected at Rs 24.48 trillion and capital expenditure at Rs 3.36 trillion.

Figures given in the interim Budget showed corporate tax collections would be higher by 15 per cent in 2019-20 over actual collections in 2018-19 and that personal income tax collections would rise by an even greater proportion — by 34 per cent. The Central Board of Direct Taxes has asked for a reduction of the target as growth is wavering. Goods and services tax collection, closely related to the health of the economy, is projected to rise by 31 per cent in the interim Budget for 2019-20 over actual collections in 2018-19.

“The fiscal deficit target will be very challenging, quite tough to meet, especially when we are looking at growth slowdown. Real growth is slowing down, inflation is low, so the nominal growth on which we collect taxes is also slipping,” said Devendra Pant, Chief Economist, India Ratings.

“In the past when we were showing a nominal growth of 12-13 per cent, if you assume a tax buoyancy of 1.1, so we used to have 14-15 odd per cent growth in tax collections year-on-year. Now, we are in a situation where nominal growth has fallen to 10-11 per cent. This will impact tax collections,” Pant added.

He said the only way the government could achieve the kind of tax growth that will make it meet its 2019-20 budgeted estimates is by removing tax exemptions and resolving all the pending tax disputes and getting something out of those, both unlikely situations.

Economists like Pant and Saumya Kanti Ghosh of State Bank of India also don’t expect any expenditure compression in the coming fiscal, especially since the Narendra Modi government, in its second term, is looking to expand on its welfare and rural-focused schemes and may look to boost demand and consumption by placing more money in the hands of rural and urban poor.

Last week, the new Union Cabinet headed, in its first meeting, approved a number of schemes aimed at the rural sector and traders. It cleared the extension of benefits of PM Kisan scheme to all land holding farmers, providing them Rs 6,000 a year. The total additional outlay of this scheme will be around Rs 13,000 crore per annum.

This means the total outlay for PM Kisan, going by the numbers for 2019-20 given in the interim budget, will be Rs 88,000 crore, including the Rs 75,000 crore allocated for small and marginal landed farmers. The cabinet also approved a pension scheme for farmers and a similar scheme for traders. No outlay for traders was provided while for farmers, the centre will spend Rs 10,774.5 crore for a period of 3 years.

India’s economic growth fell to 5.8 per cent in the January-March period of 2018-19, the lowest in 20 quarters, due to a sharp slowdown in investment and manufacturing growth and a contraction in farm output. This pulled down GDP expansion to 6.8 per cent in FY19, the slowest in the first stint of the Modi government. The economy’s revival will be a key challenge for new Finance Minister Nirmala Sitharaman.

“The income tax collections need to be growing at around 30 per cent, and expenditure numbers could be higher than what has been projected. The fiscal deficit, revenue and expenditure projections for 2019-20 will be difficult to adhere to. If the government wants to maintain a 3.4 per cent fiscal deficit, it can try, but given the current state of numbers, it looks a little difficult,” said Ghosh, who is the Chief Economic Advisor at SBI.

“The markets will be happy even if the government targets a higher fiscal deficit, but be transparent about it. The Centre should be more realistic in its revenue, expenditure and fiscal deficit projections. There is need for creditable, achievable fiscal deficit numbers,” Ghosh said.

Ghosh said that one option could be for the Reserve Bank of India to pay the government out of its capital reserves, based on what the Bimal Jalan panel recommends. As such, meeting the fiscal deficit numbers by resorting to off-budget borrowing will not serve the purpose, he said.

To meet its 2018-19 fiscal deficit target, revised to 3.4 per cent, the government had cut expenditure by a staggering Rs 1.45 trillion and sought recourse to what is popularly called off-Budget borrowings or transferring its own expenditure to state-owned entities and asking them to borrow from various sources including the National Small Savings Fund and meet the expenditure that actually should have been incurred by the exchequer. The amount of such off-Budget borrowing was as huge as Rs 1.32 trillion.

Ghosh said that the Modi government had started its first term in 2014-15 with a fiscal deficit target of 4.1 per cent when markets were expecting a higher fiscal deficit. “From that point of view, the government has walked the talk on fiscal consolidation, now it needs to walk the talk on growth,” Ghosh said. 


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