Why govt needs a fresh 20/20 vision for Budget 2020

In just about four months, the government’s 2019-20 numbers on revenue and expenditure are looking far worse than what was revealed by Finance Minister Nirmala Sitharaman when she presented her Budget on February 1, 2020.


The sharp deterioration can be seen in the provisional actual numbers on government finances for 2019-20, released by the Controller General of Accounts (CGA) on Friday. The provisional actual numbers are unaudited, but past years’ records show that they undergo very little change before becoming actual numbers.


Note that Covid-19 and the lockdown have contributed only a little to the deterioration in these numbers for 2019-20. The lockdown was imposed in the last week of March and some segments of economic activity had begun to slow down from the middle of that month.


Therefore, a bigger impact of Covid-19 and the lockdown will be seen on the Budget numbers for 2020-21, as those were framed before the pandemic outbreak. Now, the reduced revenue numbers for 2019-20 will make those targets even more difficult to achieve. The targeted growth rates for revenues, in particular, will have become higher and more difficult to even aim for, given the forecasts of a significant contraction of the Indian economy this year. 


How bad do the 2019-20 numbers look?


Serious questions on the feasibility of achieving the current year's Budget numbers remain

The CGA’s provisional actual numbers reveal that the fiscal deficit for 2019-20 will be Rs 9.36 trillion, which on the basis of the revised nominal economy size of Rs 203 trillion raises the fiscal deficit to 4.6 per cent of gross domestic product (GDP). This is a sharp deterioration in the Union government’s fiscal health. In the revised estimate (RE) for 2019-20, presented on February 1, the fiscal deficit was 3.8 per cent of GDP.


The increase in the fiscal deficit in 2019-20 has taken place because the government had to increase its market borrowing by Rs 0.57 trillion to Rs 5.56 trillion (Rs 4.99 trillion in the RE). In addition, it had to seek recourse to additional domestic financing of about Rs 1.3 trillion from sources like the National Small Savings Fund (NSSF), saving deposits and certificates and the use of surplus cash. This helped the government secure a total additional financing of Rs 1.87 trillion or about 0.9 per cent of GDP.


Why this extra borrowing?


The need for raising more borrowing and seeking recourse to additional sources of financing arose as the government’s gross tax revenues saw a further slippage. In the RE, gross tax revenues were shown to have grown by 4 per cent over 2018-19. But the provisional actuals now show that gross tax collections have actually contracted by 3.4 per cent. The shortfall over the RE figure of gross tax revenues was as much as Rs 1.53 trillion.


The only time gross tax collections declined in the last three decades was in 2001-02, when they fell by 0.82 per cent. That year the decline was mainly because of a 2 per cent drop in indirect tax collections, even as direct tax revenues showed a rise of 1.3 per cent. In 2019-20, the decline in tax revenues was largely because of a collapse in the collections of corporation tax and customs duty.


In RE, corporation tax revenues were to contract by 8 per cent when compared to 2018-19. But the provisional actuals show the contraction to be steeper at over 16 per cent. Customs duty fell by 7 per cent, against 6 per cent growth assumed in RE. Income-tax collections were expected to grow by 18 per cent according to RE, but provisional actuals show that the growth rate has plummeted to just 1.55 per cent.


Similar trends are seen in tax revenues from excise and central goods and tax revenues, where the growth rates halved to 3 per cent for excise and declined by about one-third to 8 per cent for central goods and services taxes. Net tax revenues, after accounting for the transfer to the states, were to increase by 14 per cent to Rs 15 trillion. But in the provisional actuals, they grew by only 3 per cent to Rs 13.56 trillion, signifying a shortfall of Rs 1.49 trillion.

Non-tax revenues, however, saw a smaller decline. Against an RE of Rs Rs 3.45 trillion in 2019-20, the provisional actuals peg them at Rs 3.26 trillion, a shortfall of Rs 19,000 crore.


On the capital receipts side, the government’s disinvestment inflows showed a further fall. They had already seen a 31 per cent drop in RE from the previous year, and the provisional actuals show the drop to be higher at 47 per cent. Compared to the RE figure of Rs 65,000 crore, the provisional actuals show them to be Rs 50,304 crore – a shortfall of Rs 15,000 crore.


Add Rs 1.49 trillion of net tax shortfall to non-tax revenue shortfall of Rs 19,000 crore and disinvestment receipt shortfall of Rs 15,000 crore, and the total net revenue shortfall rises to an alarmingly high level of Rs 1.83 trillion.


Some relief came from the expenditure side, where the government’s squeeze continued unabated. In RE 2019-20, the total expenditure growth had been brought down to 16.56 per cent, compared to a 20 per cent growth projected in the BE over what was spent in 2018-19. In provisional actuals for 2019-20 now, the total expenditure growth is further down to 16 per cent.


In other words, a total saving of Rs 12,000 crore (largely due to a compression in capital expenditure) over the RE estimate helped reduce the overall net revenue shortfall from Rs 1.83 trillion to Rs 1.71 trillion in 2019-20. It was this extra burden that was met through additional borrowing and by seeking recourse to financing of about Rs 1.87 trillion. The excess amount was needed as a cushion since the nominal size of the economy had shrunk from Rs 204 trillion in RE to Rs 203 trillion by when the provisional actuals were announced.


How was the expenditure load reduced?


As expected, the burden of the expenditure squeeze has been carried by capital expenditure, whose growth has been scaled down to 9 per cent according to provisional actuals for 2019-20. The capex for 2019-20 in RE had actually been raised over what was projected in BE. Revenue expenditure, on the other hand, has seen no further squeeze, with its growth according to provisional actuals for 2019-20 staying at 17 per cent, the same as in the RE.


Subsidy expenditure on three major items – fertilisers, food and petroleum – has been reined in further. Growth under BE for 2019-20 was 53 per cent, largely because of the introduction of the PM-KISAN scheme, but this was brought down to show only 15 per cent growth in RE. The reduction was on account of transferring the expenditure burden to extra-Budgetary resources and postponement of payments. The provisional actuals for subsidy spend during 2019-20 now show a lower growth rate of 13 per cent, suggesting that the government may have postponed the payments or taken recourse to more extra budget borrowings to keep a check on its subsidy bills.


States take an additional hit


A casualty of lower growth in revenues in 2019-20 has also meant drying up of resources for the states. According to RE 2019-20, the states got Rs 6.56 trillion as total transfer of revenues from the Centre. This was much lower than the BE estimate of Rs 8 trillion, and this was because the Centre’s tax revenues had shrunk. Now, the revenues have fallen further. Thus, the provisional actuals show the transfer of tax revenues to states at Rs 6.5 trillion, a drop of 14.5 per cent over what was shared in 2018-19. The higher decline in the states’ share is on account of the Centre relying increasingly on revenues from cess, etc, which are not part of the divisible pool.


Dim prospects for 2020-21

With the impact of Covid-19 and the lockdown on the economy, the Budgetary projections for 2020-21 look very ambitious, even unrealistic. All the Budget projections were made on the premise of 10 per cent nominal growth in the economy. With much lower nominal economic growth, the revenue projections for 2020-21 will go awry.


The base level for revenue collections in 2019-20 has also gone down and, therefore, the target growth rates for 2020-21 will be even higher. For instance, gross tax collections have to grow by over 20 per cent, compared to the earlier target of 12 per cent.


Can the government expect corporation tax collections to grow by 22 per cent in 2020-21 in a post-Covid world? Or can there be a 33 per cent jump in income-tax collections? And what happens to the 317 per cent increase projected to be mobilised through disinvestment of government shares in public-sector undertakings during the year? A similar situation will prevail for other revenue streams.

All these point to an urgent need for re-evaluating the Budget’s revenue numbers for 2020-21 and revising them to make the targets realistic. A much higher fiscal deficit for 2020-21, of at least 5.3 per cent of GDP, is now a given, as the government has decided to increase its borrowing by 54 per cent. A part of these additional borrowings may help absorb the impact of the likely revenue shortfall. But an early assessment of revising the revenue numbers to a target that is more achievable will enhance the credibility of the Budget exercise.


FRBM implications serious, but transparency a silver lining


A tricky problem the government now faces is how it can justify its deviation from the path of fiscal consolidation mandated by the Fiscal Responsibility and Budget Management (FRBM) Act. While presenting Budget 2020 in February, the finance minister had indicated that a deviation of half a per cent of GDP was allowed in the FRBM Act under certain circumstances. That is how the deficit figure of 3.3 per cent given in the Budget Estimate for 2019-20 was raised to 3.8 per cent of GDP in the RE. The question is on what grounds the government will justify a further deviation of 0.8 percentage point under the FRBM Act.


A redeeming feature in the entire exercise of revising the fiscal numbers for 2019-20 is that the finance minister has introduced an element of transparency that was missing earlier. This is not the first time that the provisional actuals of a Budget have reduced revenues of the government by a huge margin. The provisional actuals for the 2018-19 Budget, released at the end of May 2019, had also brought out a huge net tax revenue shortfall of over Rs 1.67 trillion.


But the government then had sought recourse to some expenditure saving and some imaginative accounting. A large part of the shortfall was met through off-Budget borrowing. As a result, even though the government’s liabilities went up, the headline fiscal deficit number remained unchanged at the promised 3.4 per cent of GDP. Fiscal purists, however, complained about such large-scale recourse to off-Budget borrowing to hide the actual extent of the fiscal slippage.


For 2019-20, the big difference is that the government has made a clean breast of its fiscal management. By significantly limiting its recourse to off-Budget borrowing, it has raised its market borrowing and obtained more funds from various other instruments like the NSSF, deposits, securities, certificates and cash drawal. The slippage of 0.8 per cent of GDP in the deficit has been conceded and accounted for transparently. This is a welcome change.

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