While upgrading India's sovereign rating from Baa3 to Baa2 in November last year, Moody's elucidated that "a material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating".
Over two months after the upgrade - for many a testimony to Prime Minister Narendra Modi's push for economic reforms - the government is staring at a possible slippage from its fiscal deficit roadmap. The government, which had announced an additional borrowing of Rs50,000 crore in the last quarter of the financial year, setting off talks of it missing the target of 3.2 per cent fiscal deficit by a wide margin, did partial damage control by reducing the figure to Rs20,000 crore.
Is this the silver-lining economists and fiscal fundamentalists have been looking for in the dark cloud hovering over the economy? Is this a sign of the government's growing confidence in its ability to mobilise enough revenue to pay for some of the 'extravagance' leading up to the 2019 General elections? Or is it just delaying the inevitable - going off the fiscal consolidation roadmap - to next year?
While the decision to reduce the additional borrowing by Rs30,000 crore is encouraging, according to many economists, the risk of breaching of the fiscal deficit target remains; fiscal deficit in absolute terms has already reached 112 per cent of the Budget estimate of Rs5.46 lakh crore.
"The fiscal deficit target may be breached by 10 basis points instead of the 30-40 basis points expected after the Rs50,000 crore additional borrowing was announced," says a chief economist of a pharmaceutical and financial services company. He refused to be quoted as he is not the authorised spokesperson.
Pronab Sen, an economist and former chief statistician of India, says the Rs20,000 crore additional borrowing will not be enough to fill the non-tax revenue gap. While the Budget last year had estimated a non-tax revenue of Rs2.89 lakh crore, till November 2017, the government had collected just one-third of it (Rs1.05 lakh crore or 36.5 per cent of the target). Non-tax revenue of the government includes dividends from PSUs/RBI, interest income, etc. One of the major disappointments came from the RBI, which paid only Rs30,659 crore, less than half the Rs65,876 crore it had paid in 2015/16. The government had budgeted for Rs58,000 crore dividend from RBI; it has sought Rs13,000 crore from RBI.
Tax Collection: GST Spanner
In a recent press statement, the finance ministry said that provisional direct tax collections up to January 15 were Rs6.89 lakh crore, 18.7 per cent higher than the net collections for the corresponding period of the previous year. This is 70 per cent of the Budget estimate (Rs9.8 lakh crore).
This means the government is on its way to meeting the direct tax collections target, which is 15.6 per cent above the 2016/17 revised estimates. March, the last month of the financial year, sees a sharp jump in collections. For example, in 2016/17, almost 27 per cent of the total direct tax collected came in March. With over two months to go for the financial year to end, the government can be expected to beat the direct tax collections target.
However, GST figures do not give similar confidence. Monthly collections have been continuously falling - from around Rs95,000 crore in July, Rs91,000 crore in August, Rs92,000 crore in September and Rs84,000 crore in October to Rs80,300 crore in November. This could neutralise the effect of buoyancy in direct tax collections.
The Controller General of Accounts data show that till November 2017, indirect tax collections were just over Rs6 lakh crore, including IGST (Rs1.38 lakh crore) and GST Compensation Cess (Rs30,900 crore). Half of IGST and the entire compensation cess collections go to states.
"Stripping off 50 per cent IGST inflows and the entire GST compensation cess receipts in November 2017 indicates that the balance taxes contracted by a considerable 14.8 per cent relative to November 2016, reinforcing worries related to the momentum in tax collections," says an ICRA report.
Aditi Nayar, Principal Economist, ICRA, says: "Previously, excise duty and service tax collections used to show a considerable uptick in the fourth quarter. We are awaiting the data for the ongoing quarter to understand whether GST collections will display a similar pattern." She hopes that the introduction of the e-way bill in February 2018 may boost compliance (and improve GST collections).
Pronab Sen says it will be difficult for analysts to see any trend in GST collections in immediate future. He expects uncertainty even in the next financial year. The government has budgeted for only 8.8 per cent growth in indirect tax collections; it is unlikely that the target will be achieved.
Interacting with media after the 25th GST Council meeting in Delhi, Revenue Secretary Hasmukh Adhia said the government was confident of achieving the indirect tax collection target. However, it sounded equally concerned on poor collections and announced some anti-evasion measures to check leakages.
Given the uncertainty over GST collections, the government would set a moderate target for 2018/19. However, it may set an ambitious direct tax collection target as it believes demonetisation and GST have expedited the formalisation of the economy and improvement in business activities will boost GDP growth. There are reports that the government may budget for 12 per cent nominal GDP growth in 2018/19, up from 11.75 per cent for 2017/18.
After encouraging disinvestment collections in 2017/18 - so far the government has collected Rs52,378 crore, or 72 per cent of the Budget estimate of Rs72,500 crore - the government is likely to set similar, if not higher, targets. NITI Aayog - the government think-tank - has recommended privatisation of 34 sick public sector units so far. Some of these may be taken up in the next financial year. Air India may also be divested next financial year.
Can the government afford to reduce expenditure to adhere to the fiscal deficit target? Given that 2019 is an election year, it is unlikely that government will sacrifice the ruling party's electoral prospects for fiscal prudence.
As economist Abhijit Sen said in Business Today's pre-Budget discussion, the government may try to adhere to the 3.2 per cent fiscal deficit target in the current financial year and may like to ease the target in 2018/19.
Economists are not confident that the government will be able to adhere to fiscal deficit targets either in 2017/18 or 2018/19. "Given the continuing uncertainty regarding revenue buoyancy, we do not expect the Union Budget to stick to the previously announced fiscal deficit targets for FY2018 and FY2019," says Aditi Nayar of ICRA.
Some economists believe that the government next year might use the escape clause given by the N.K. Singh Committee for review of the Fiscal Responsibility and Budget Management Act. The committee says that breach the fiscal deficit target by 0.5 per cent in case of some economic instabilities.
There are impending global and local risks also that may make it difficult for the government to stay on course the fiscal roadmap. These include rising crude oil prices, which may increase the fuel subsidy outgo, and interest on bank recapitalisation bonds which have to be provided for in 2018/19.
At the time of Budget presentation, the government can still say it would stick to the fiscal deficit target as any shortfall in GST collection in the current year can be plugged in the next year by implementing the anti-evasion measures. It is, anyways, gung-ho about the sharp jump in direct tax collection.
It remains to be seen if the government bites the bullet on fiscal deficit or continues to put up a brave face in the upcoming Budget.