The first advance estimates by the government puts the nominal GDP growth for 2019-20 at 7.5% against the Budget target of 12%. Besides being the lowest in last 42 years, a 7.5% nominal rate growth throws the government finances out of gear.
A slower nominal growth not just means a lower GDP number at the end of the financial year, but also lower tax collections as top line of the corporate sector is linked to the nominal growth rate. This means, the fiscal deficit for the current financial year could very well be close to 4% of the GDP.
In an interview to Business Today, former finance minister P Chidambaram said that even after keeping aside the off-budget, the fiscal deficit for the current financial year could be 4%. "The new expenditure Secretary who's a bit stringent, they would probably end up with 3.7-3.8%," says Chidambaram.
Analysts and experts across the board are now looking at a fiscal deficit of close to 3.8%. "We expect the central government to post a higher fiscal deficit print of 3.5-3.8% and also review the implied FRBM roadmap for fixing fiscal deficit target for FY21 amidst the prevailing global and domestic macroeconomic and financial conditions," says a report by Yes Bank.
The government has budgeted for a fiscal deficit of Rs 7 lakh crore, and based on its nominal GDP target of Rs 211 lakh crore at 12% growth, the fiscal deficit was estimated to be 3.3% of the GDP. However, with economy slowing down and growth now estimated to be 7.5%, the nominal GDP now is likely to be Rs 204 lakh crore. So, even if the government manages to keep the fiscal deficit at Rs 7 lakh crore, it would breach the 3.4% mark.
Till November 2019 (the latest data released by the government), the fiscal deficit in value term was just over Rs 8 lakh crore, 115% of the full year target of Rs 7 lakh crore. Normally, going by the past trend, it has been seen that in the last quarter of the financial year, due to spike in revenue collection or cut in expenses, the government manages to keep the fiscal deficit to a maximum of 105% of the budget target.
Serious revenue constraints
However, this year the government may face serious revenue constraints owing to the fact that tax collections - both direct and indirect - have been very muted. The government faces a shortfall of Rs 2-2.5 lakh crore in tax revenue collection primarily because of two main reasons - muted GST collections and a Rs 1.45 lakh crore dent to direct tax revenue collection due to corporate tax rate cut announced in August 2019.
Therefore, any hope of sharp jump in revenue collection in the last four months of the financial year looks distant. Of course, the government has made its intentions clear that it would keep expenditure in check in the last quarter of the financial year. But that may not be enough for the fiscal deficit to breach the budget target of 3.3% of the GDP given the revenue constraints.
The Centre's share of GST collections budgeted for the current financial year was Rs 6.63 lakh crore, up 14% from Rs 5.8 lakh crore in 2018-19. Till November, the centre's share of GST collection has been Rs 3.99 lakh crore, 60% of the budgeted estimate. Different estimates suggest that the Centre may fall short of at least around Rs 50,000 crore from its budgeted GST collection target.
"Our estimates suggest overall GST collection is likely to be short of the budgeted amount by Rs 84,000 crore, with Centre's gross collection and State GST each lower by Rs 42,000cr. This is even after assuming a mild pickup in the next three months," according to Sreejith Balasubramanian, economist at IDFC Mutual Fund.
It must be mentioned here that the centre's gross GST collection (CGST + net IGST + Cess) was marked down by Rs 1 lakh crore and further by Rs 62,000 crore as it moved from Budget Estimate to Revised Estimate (RE) and then to Actual.
Direct tax collections till November 2019 have seen a muted 2.74% growth vis-a-vis previous year. The budget has estimated a 19% growth in direct tax collection (at Rs 13.35 lakh crore) in the current financial year compared to Rs 11.25 lakh crore collected last year. Till November, the government collected Rs 5.56 lakh crore in direct taxes.
Corporate tax collections in September-November 2019 period showed a drop of 4%. The corporate tax rate cut was announced in August with retrospective effect from 1 April 2019.