The government’s decision to expand its market borrowing programme for 2017-18 by Rs 50,000 crore is a clear signal that the fiscal deficit target of 3.2 per cent of the gross domestic product (GDP) may be breached. The government’s finances have not been in the best of health and the strain has been showing on the expenditure as well as the revenue fronts. Data from the Controller General of Accounts showed that the fiscal deficit had reached 96.1 per cent of its full-year target by the end of October, much higher than the 79.3-per cent mark it had touched during the same period a year ago. To some extent, it was expected that there might be some amount of additional borrowing by the government, but the markets were surprised by the quantum. Though the overall impact on the fiscal deficit will be softened by lower issuance of treasury bills, the general expectation is a 30-70 basis points slippage in the fiscal deficit. These worries were evident in bond yields, which shot up.
There are several reasons why the government finds itself in a vulnerable position. On the revenue front, collection of the goods and services tax (GST) is a cause for concern. The total GST collection added up to Rs 80,808 crore in November, which was a 14 per cent drop from receipts in July when the new indirect tax system was introduced. The sharp fall is being attributed to the wide-ranging cuts in tax rates that the GST Council permitted after complaints arose in several quarters. But the situation may not improve much as the December GST collection is likely to reflect the effects of long-pending refunds. It is noteworthy that the GST revenue accounts for about 35 per cent of the Centre’s gross tax collections and a significant shortfall on this account will land the government in trouble. Moreover, non-tax revenue has been underwhelming. The Reserve Bank of India has slashed its dividend by around Rs 30,000 crore — though efforts are on to persuade the central bank to shell out more — and spectrum fees from telecommunication companies have fallen far short of target. Though the government is banking on higher disinvestment receipts and dividends from public sector units, these may not be adequate mitigating factors this year.
On the expenditure front, too, the picture is not pretty. There has been increased outgo on account of the Pay Commission’s recommendations. Apart from the actual deficit numbers, what is equally crucial is that the Narendra Modi government is now entering its last phase before the next general election. There is just one full Budget left at its disposal, and with widespread rural distress there is an apprehension that the government may resort to populist measures. Finance Minister Arun Jaitley has amply demonstrated his determination to maintain macroeconomic stability. This resolve must not weaken during the run-up to the 2019 general election. In the absence of revenue certainty, the government should go in for well-targeted capital expenditure so that a deepening of the fiscal problem is avoided.