The fiscal deficit for 2019-20 is running at 115% of the budget target, with direct tax collections growing at a measly 2.7% between April and November. To meet indirect tax targets, goods and services tax (GST) collections have to clock Rs 1.1 trillion monthly in the last quarter (January-March) — a number that has been achieved only once this year.
Add to this, a dismal advance estimate of GDP for the full year at 5% in real terms and 7.5% (apparently a 42-year low) in nominal (money value) terms, and the stage seems set for a large overrun in the fiscal deficit (FD) from the budget target of 3.3% of GDP.
There seems to be consensus around the fact that the best that GoI can do is to limit FD to 3.8% using up the 0.5% buffer that the Committee to Review Fiscal Discipline rules has recommended. However, despite this barrage of bad data, it is possible that the FD could end up being no higher than 3.6% of GDP and perhaps even closer to the target.
To understand how this is possible, let’s do a quick summary of the fiscal math. First, the bad news. The fact that nominal or GDP growth has come in at just 7.5%, instead of the budgeted 11%, on its own pushes the deficit up by 0.11% of GDP. Besides, there is likely to be a sizeable shortfall in disinvestments from the Rs 1.1trillion target.
GoI asset sales have yielded a mere Rs 17,364 crore with more than 80% of the target yet to be realised. The big chunk of GoI’s strategic sale plans — close to Rs 70,000-80,000 crore — in Bharat Petroleum Corporation Limited (BPCL), Container Corporation (Concor) and Air India seem unlikely by March 2020. Factoring in some last-minute fire sales and asset monetisation proceeds, we are looking at a shortfall of close to Rs 40,000-50,000 crore in disinvestments this fiscal.
So, how can we claim that GoI will prevent FD from straying significantly from the target? The answer lies in expenditure compression. GoI has been cutting its expenditures (from targeted levels) through the year, and the pruning will pick up speed in the current quarter. In fact, the finance ministry’s recent decision to restrict expenditure to 25% of budget estimates (BE) in the fourth quarter from the earlier limit of 33% of BE could amount to savings of a humongous Rs 2.23 trillion.
The lion’s share of the expenditure cutbacks is likely to come in ministries that have underspent so far this year. For example, the ministry of agriculture has spent only 49% of its budget allocations between April and November 2019, leaving 50% of the spending for the fourth quarter. Other ministries that have underspent so far include roads (63%), health (66%), civil aviation (39%), IT (58%) and tourism (43%).
The good news is that the axe hasn’t yet fallen heavily on GoI’s capital spending, and in the April-November period growth has been 11.7%, just a smidge lower than the budgeted growth of 11.8%. The major brunt of expenditure cuts has been being borne by revenue expenditure with a year-to-date growth of 13%, compared to the budgeted growth of 22%. Apart from savings from this expenditure compression, RBI’s surplus transfer to GoI of Rs 58,000 crore (0.3% of GDP), over and above the budgeted Rs 90,000 crore, is also likely to provide an additional fiscal cushion this year. Put all these bits together and what emerges is a FD below 3.6% of GDP.
Picking a Strategy
What are the implications of avoiding a large deficit overrun? For one, GoI may be able to fund the deficit without resorting to higher borrowings from the bond market than planned. This could help keep long-term interest down. It would also save us the sermons from the international rating agencies and the threat of a downgrade at least in their outlook for the Indian economy.
So far, so good. However, there is a risk that this strategy could backfire on GoI. For one thing, it could shrink demand further. The advanced estimates for GDP and its components released last week show that while investments have not grown at all, private consumption growth has faltered at a sluggish 5.8%, compared to 8.1% for 2018-19. The 5% growth estimate for 2019-20 comes largely on the back of a solid 10.5% growth in government consumption over the current year. However, the brutal cut in the current quarter could well mean that actual growth will be lower than the advance estimate of 5%.
If we see GoI’s expenditure compression as part of its long strategy, fiscal stimulus for the next year seems to be off the table. However, the case against stimulus seems far from convincing. In fact, the absence of a stimulus in 2020-21 could mean yet another year of sluggish growth, low tax revenues and an enduring fiscal drag. With an effective stimulus, however, the economy could gain momentum, changing the entire fiscal landscape for the better. Thus it may make sense to bite the bullet, prime the economy, and fret over fiscal consolidation once growth picks up.
(Barua and Gupta are chief economist and senior economist, HDFC Bank, respectively)