Come clean on the fisc

The Union finance ministry has reportedly informed the Fifteenth Finance Commission of the straitened nature of Indian public finances. The ministry is of the opinion that the tax shortfall in the ongoing fiscal year will be around Rs 2 trillion. This is in the same ballpark as the degree by which the provisional actuals for the last fiscal year, 2018-19, were less than the Budget estimates. The last Union Budget projected revenue for the coming year at Rs 22.4 trillion. A shortfall of this magnitude would mean that either revenue would be raised from non-tax sources, spending would have to be severely crunched, or the fiscal deficit would miss the target of 3.3 per cent of gross domestic product (GDP). None of these is a palatable option. A fiscal crunch at a time when the Indian economy has clearly slowed sharply would run the risk of entrenching the slowdown or even turning into a downward, self-reinforcing spiral. Raising non-tax revenue could be one option. However, things have not moved fast enough on this front. The government will need to move ahead with the stated idea of strategic sale to bridge the shortfall in receipts under other heads.

On the other hand, if expenditure cannot be compressed — and the finance minister has publicly committed to preserving the amount of capital spending in particular — then, in other words, the fiscal deficit might effectively increase from the targeted 3.3 per cent of GDP to something closer to 4 per cent. The fact is that this reversal of the fiscal consolidation process will throw into question the entire glide path to 3 per cent of GDP, which has long been promised. But transparency is a virtue in and of itself. The credibility of government figures has been questioned widely following the Union Budget’s reliance on the inflated, revised estimates of tax revenue rather than the provisional actuals, which were estimated after last year’s tax shortfall had become clearer. This added to the confusion about the actual borrowing target of the whole public sector — a confusion created partly by the decision to use borrowing against public-sector enterprise balance sheets to fund spending that might previously have been accounted for in the Union Budget. 

The credibility of government budgeting needs to be restored. There has been a crisis of private investment in India partly because of the ongoing uncertainty about the nature and quality of public-sector spending. This uncertainty must end and transparency restored. A real fiscal picture must be provided. It will also help in addressing the problems in both revenue and expenditure more transparently. The finance minister promised at the International Monetary Fund meeting that India would stick to the fiscal consolidation programme. While her determination to not review the fiscal deficit target is admirable, the reality may be different. The problems with the goods and services tax and the slowdown that impacts direct tax revenue are certainly major events that would affect the budgeting and fiscal consolidation paths of any government anywhere. A one-time re-evaluation of the fiscal position and a new credible glide path or spending framework, alongside a transparent public-sector borrowing requirement, should be priority for the finance ministry.

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