The government has bitten the fiscal bullet and taken the option of diverging from the fiscal deficit glide path in favour of stimulating growth. The Budget, presented by Finance Minister Nirmala Sitharaman, has taken the 0.5 per cent escape route provided by the Fiscal Responsibility and Budget Management (FRBM) Act and relaxed the fiscal deficit - the amount by which its expenses exceed receipts - target from 3.3 per cent to 3.8 per cent of GDP in 2019/20. This without taking into account the Rs 1.72 lakh crore raised through extra-budgetary resources. If these are added, the fiscal deficit goes up to 4.6 per cent. The government plans to raise Rs 1.86 lakh crore through extra-budgetary resources in the next financial year.
Finance Minister Nirmala Sitharaman, in her post-Budget media briefing, explained why the government had to deviate from the path of fiscal prudence: "We had announced in July (Budget) a target of 3.3 per cent (fiscal deficit), but subsequent to that, because of the challenge we faced (in the economy), we wanted to put more money in hands of people to improve consumption demand and public investment as private investments were not happening." She further said that due to various reasons - natural calamities, compliance issues and other unexplained reasons - GST collections were coming down. "On the one hand, your revenue generation
could not be pressed further and on the other there was a clear demand for public spending. It was obvious that we had to go on spending. So, without violating the FRBM Act, we had to seek the escape clause (going off the fiscal glide path by up to 0.5 per cent)."
While the finance minister only talked about moderate growth in GST collections, Budget data shows the drying up of all revenue sources. There is not much hope in the next financial year either with the government lowering its 2020/21 nominal GDP growth rate estimate to 10 per cent as against the 12 per cent target for the current financial year. The government has budgeted for a fiscal deficit of 3.5 per cent of GDP for the next financial year.
Tax Revenues: Missing the Mark
The 2020/21 target of gross revenue collection is Rs 24.23 lakh crore, almost Rs 40,000 crore less than the 2019/20 Budget estimate of Rs 24.61 lakh crore. Tax collections in the current financial year have been revised downward by almost Rs 3 lakh crore to Rs 21.63 lakh crore, largely due to a sharp drop in corporate tax collections (from Rs 7.66 lakh crore to Rs 6.10 lakh crore), and lower GST and excise collections, both of which are falling short of the Budget estimate by Rs 50,000 crore each.
Though the government had budgeted for Rs 1.45 lakh revenue hit due to the corporate tax rate cut a few months ago, Budget documents suggest the revenue impact could have been Rs 1 lakh crore. The rest of the fall in collections could be due to slowdown in the economy, which is likely to grow at a real rate of 5 per cent (with nominal GDP growing around 7.5 per cent). Next year, gross revenue collections have to grow at 12 per cent against the revised estimate of the current financial year. This year, going by the revised estimate, the growth in gross tax revenue could be a mere 4 per cent.
In corporate tax, while the Budget estimate for next year's collections, Rs 6.8 lakh crore, is lower than the Budget target of Rs 7.66 lakh for the current financial year, the government is budgeting for 11.5 per cent growth in the next financial year. Achieving such growth in a year the government expects 10 per cent nominal GDP growth is a tough ask. It has been made even tougher by abolition of the dividend distribution tax (DDT), which would have added Rs 60,000 crore to the corporate tax kitty. Next year, dividend will be taxed in hands of investors, and so will come under income tax. The government expects a loss of Rs 25,000 crore due to abolition of DDT. The government is bullish on the income tax front too. It is expecting a 14 per cent jump, partly because it expects around Rs 35,000 crore by taxing dividend in hands of individuals.
In GST, the collections (revised estimate of Rs 6.12 lakh crore) in the current financial year are short of target by around Rs 50,000 crore. Yet, the government has estimated per cent growth in GST collections at Rs 6.90 lakh crore in the next financial year. This confidence could be on the back of various anti-avoidance measures such as e-invoicing and new return-filing system kicking in from April 1. However, going by the new target, monthly GST collections have to be around Rs 1.15 lakh crore. Till December 2019/20, the average for the year has been Rs 1.01 lakh crore.
When asked about the reason for her confidence in limiting the fiscal deficit to 3.5 per cent in 2020/21, the finance minister said: "The way revenue generation is improving - in the last three months, GST collections have crossed Rs 1 lakh crore - my guess is that the benefits of corporate rate cut will come into play in the next few months. This will give me some comfort so that it can come down to 3.5 per cent from 3.8 per cent (of GDP)."
High Disinvestment Target
The disinvestment target for 2020/21 has been more than trebled to Rs 2.10 lakh crore from the 2019/20 revised estimate of Rs 65,000 crore. The 2019/20 Budget target was Rs 1.05 lakh crore. The government is hopeful that the unmet target of this financial year will be met the next year. A large part - Rs 90,000 crore - is likely to come from sale of stake in Life Insurance Corporation (LIC) and IDBI Bank. At present, the government of India holds a 47.11 per cent stake in the bank which, at the current market price, will fetch over Rs 18,250 crore. The rest is expected to come from a stake sale in LIC. Another Rs 1.2 lakh crore is likely to come from sale of companies like Bharat Petroleum Corporation Ltd (BPCL), Shipping Corporation of India, Container Corporation of India and Air India.
When asked about the steep disinvestment target for 2020/21, Sitharaman said between July (when she presented her last Budget) and January, a lot of work has gone into achieving the target. "You will see successful disinvestment in the next few months but accounts for this year will be closed by March 31, 2020. A lot of leg work has been completed, the benefits of which will be realised next year," she said. "Several transactions are lined up. Air India expression of interest (EoI) is out; very soon, BPCL EoI will be out too. Some disinvestments will be completed this year but many will be completed next year. Therefore, we are very hopeful (that) we will achieve the disinvestment targets," said Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management.
A Steep Climb
The government seems to be pinning a lot of hope on a sharp jump in disinvestment proceeds next year even as there is limited scope for getting more from other avenues of income such as tax and dividend receipts from CPSEs and the Reserve Bank of India (RBI). With the RBI giving it Rs 1.51 lakh crore (including Rs 58,000 crore surplus) in the current financial year, there is hardly any scope for a bigger payment even if the government has budgeted for Rs 89,000 crore dividend from banks and RBI.
Given the financial constraints, sticking to the 3.5 per cent fiscal deficit target in the next financial year will be a tough task for the government.