With the availability of FY2018/19 revised estimate (RE), we now have an account of fiscal reforms under the NDA government from 2014/15 to 2018/19. A comparison between the final year of the previous regime (UPA II) and the corresponding year of the current government underlines the broad direction of fiscal reforms undertaken by the latter. Quite clearly, the Modi government focussed on augmenting the tax-GDP ratio throughout this period. With an expansion in the income tax base and the fall in global crude prices, especially in 2015/16 and 2016/17, it became possible to increase both direct and indirect tax revenues relative to GDP.
From 2013/14 to 2018/19 RE, direct and indirect tax revenues increased by 0.7 per cent points and 1.1 per cent points of the GDP, respectively. Put together, the increase in the Centre's gross tax revenues-to-GDP ratio amounted to 1.8 per cent points of GDP in this period. However, the central government could access only 0.6 per cent points of this increase. This was mainly due to the increase in states' share in central taxes. A fall in the non-tax revenues-to-GDP ratio by a margin of 0.3 per cent points effectively reduced the gain in the Centre's revenue receipts-to-GDP ratio over this period to 0.2 per cent point. There was some gain in non-debt capital receipts as well through disinvestments.
However, achieving fiscal consolidation remained a high priority for the government. So, it complemented tax-side reforms with expenditure-side reforms. With the introduction of direct benefit transfers, the overall subsidy bill was reduced by a margin of 0.7 per cent of GDP. This enabled a reduction in the revenue expenditure-to-GDP ratio by 0.9 per cent points. Together with the marginal revenue-side gains, it became possible to reduce the fiscal deficit-to-GDP ratio from 4.5 per cent in 2013/14 to 3.4 per cent in 2018/19. Also, there was some improvement in the fiscal deficit quality as the share of revenue deficit in fiscal deficit fell from 71 per cent in 2013/14 to 64.8 per cent in 2018/19. And the direction of fiscal reforms was quite appropriate in almost all dimensions.
But in 2019/20 Budget Estimates (BE), these improvements appear to have been stalled. When we compare 2018/19 RE with 2019/20 BE, the reduction in fiscal deficit-to-GDP ratio is zero. The revenue expenditure-to-GDP ratio has increased by 0.3 per cent points, and the capital expenditure-to-GDP ratio has fallen by about 0.1 per cent points. The quality of fiscal deficit has also deteriorated by 2 per cent points. Given the pre-poll nature of the Interim Budget, this might be a temporary pause to boost disposable incomes of farmers, middle-income class and workers in the unorganised sector, and strengthen private consumption expenditure.
GDP growth numbers provide an anomalous picture if we use the revised CSO estimates released in January, in conjunction with the advanced estimates for 2018/19. These numbers indicate a steady and sharp fall in the real GDP growth, which was 8.2 per cent in 2016/17 (demonetisation year), 7.2 per cent in 2017/18 (GST year) and 5.9 per cent in 2018/19 in advanced estimates. Clearly, there are no objective indicators to indicate such steady year-by-year fall in the real GDP growth numbers.
The Budget gives estimates of GDP at current prices for 2019/20 and 2018/19. The implicit nominal growth for 2019/20 is 11.5 per cent. The absolute magnitude of GDP in 2018/19 is the same as given in the advanced estimates. So, it can be assumed that the Budget is going with the GDP numbers of the advanced estimates. The key concern is whether fiscal consolidation will be restored in the regular Budget. By that time, we may have revised GDP numbers as well as revised numbers for fiscal aggregates to formulate a view on the prospects of fiscal consolidation.
The writer is Chief Policy Advisor, EY India (opinion is personal)