The past six months have witnessed a torrent of dismal economic news. The Budget is three weeks away and there is little reason to believe that the pall of gloom will lift. Here’s why.
Revenues for 2019-20 projected in the July Budget simply cannot be realised. The estimate for gross tax revenue (GTR) was Rs 24.6 trillion, a 9.5 per cent increase over revised estimates (RE) of Rs 22.5 trillion for 2018-19. The problem, however, is that the actual GTR for 2018-19 was Rs 20.8 trillion, implying an 18.3 per cent increase, which was never possible.
In its recent (December 2019) submission to the Fifteenth Finance Commission (FFC), the government stated that GTR was now estimated to be Rs 23.6 trillion, a clear Rs 1 trillion short of the target. The shortfall will actually be far more — do the math. Assume that corporate, income taxes and goods and services tax (GST) grow by 8.5 per cent (ambitious), customs by 7 per cent (unlikely) and Union excise by 10 per cent over the actuals for 2018-19. Deduct Rs 0.6 trillion (conservative) for the corporate tax cut. The GTR comes to Rs 22 trillion, Rs 2.6 trillion short. So, on a conservative basis, the GTR shortfall will be 1.25 per cent of gross domestic product (GDP). Other estimates doing the rounds peg GTR losses at Rs 3 trillion, or 1.4 per cent of GDP.
The implications are clear. The central government’s net tax revenue (NTR) will be Rs 14.75 trillion, Rs 1.75 trillion short. Capital receipts from disinvestment were projected as Rs 1.05 trillion. This target cannot be met; at best realisation may be Rs 0.3 trillion. So, NTR plus capital receipts are likely to be short by Rs 2.5 trillion. This translates into a fiscal deficit (FD) slippage of 1.2 per cent of GDP.
The estimated slippage does not take into account other creative measures (deferring payment of bills) and off-book shenanigans (public sector unit borrowing to meet government obligations). Food and fertiliser subsidy carryovers in 2019-20 are estimated to be Rs 0.8 trillion and Rs 0.6 trillion, respectively (together 0.7 per cent of GDP).
The Ministry of Finance (MoF) cannot publicly concede such a large slippage. So, what should we expect it to do? First, let the fiscal deficit slide to, say, 3.8 per cent of GDP. This will not be unexpected. Second, shave the balance (0.7 per cent of GDP) by a combination of expenditure cuts, deferred payments (including the GST compensatory cess to states) and exaggerated RE revenue receipts for 2019-20. At year-end, there is little else the mandarins can do.
And, future prospects are not cheerful. In the submission to FFC, the government has projected that in 2020-21 food, fertiliser and fuel (FFF) subsidies will amount to Rs 4.9 trillion as against Rs 3 trillion in 2019-20. Fuel subsidies are expected to triple and fertiliser subsidies to almost double. GTR is projected to grow by 12.9 per cent in 2020-21, an unlikely prospect given the exaggerated base revenues of 2019-20. On more realistic estimates of revenues, the growth comes to an impossible 19 per cent. In short, be ready for déjà vu.
The upshot is that there is just no fiscal headroom for providing a stimulus. So, much of the talk of pump-priming through huge public investment is just that— talk. The top priority must be to fix the fisc.
The revenue deficit (RD) is 2.4 per cent of GDP and must be reduced. This implies subsidy cuts, though it seems there is little appetite for subsidy reduction or rationalisation. Consider the following. Above Poverty Line households get a 75 per cent price subsidy on wheat and rice; in 2002, the subsidy was 34 per cent. For Below Poverty Line, the price subsidy was 46 per cent in 2002; it is now 83 per cent. LPG subsidy under direct benefit transfer (for the non-poor) is ballooning; surely there is a case for rationalisation. In an earlier column, I had mooted specific proposals for subsidy reform and redirecting public expenditure (Business Standard, 2 and 3 November 2015).
Another way to reduce the deficit is to target tax expenditures. Some economists estimate this can yield fiscal space of 3-4 per cent of GDP. The reality check could be the fourth or fifth version of the direct tax code (DTC). Any bets on tax expenditure reform?
Faltering growth has been diagnosed extensively and a slew of recommendations (some contradictory) have been made. Reviving investment is a common refrain. As is boosting consumption. A common prescription to accelerate growth is “major reforms”, mostly left undefined. This when the credit system is severely stressed. And, we are in the throes of a fiscal crisis: A cutback in expenditures by the Centre of Rs 2.2 trillion is reportedly on the cards. This will impact growth and revenues with knock-on effects on the credit system.
Without last-minute expenditure cuts, the FD would be 5.2 per cent of GDP (including only the carryovers of food and fertiliser subsidies). The FD needs a 2 per cent reduction. Taxation revitalisation is imperative (including the DTC). However, expenditure restructuring is the critical reform. We need 2-2.5 per cent of GDP to fix the credit system; without this, the drag on growth will simply persist. A similar amount is needed to spur public investment and promote complementary private investment. True, sectoral reforms are urgently needed in power, telecom, transport and coal to revive private investment and staunch public dissaving.
A 5 per cent correction in the fisc is no easy task. But, it is not impossible. It will take two to three years, as in 1991. The imperative is to start now. And, that means coming clean on the state of India’s public finances.
The writer is the former chairman of Trai