Why government needs to cut spending

The government may find it hard to stick to its fiscal deficit target of 3.3% of GDP, feel select analysts and economists, but others say the target could be achievable if the Centre curtails its expenditure and there are no revenue shocks further. If the country does slip up, albeit marginally, this will make 2018-19 the third consecutive year when the actual deficit will fall short of the target. The real culprit then would be a lower-than-expected collection in tax revenues, both from direct and indirect taxes. 

Also, the government's earlier decision to cut excise duty on petrol and diesel may somewhat contribute to the slippage, besides its underwhelming push for disinvestment where the actual proceeds are nowhere near the target. Further, as telecom companies – a major source of government revenue – also jostle for deferring spectrum payments, the actual fiscal deficit could rise. But here's the good news: softening global crude prices may come to the rescue and improved GST collections in the remaining months of the fiscal plus an uptick in direct tax collections could contain the fiscal slippage.

Madan Sabnavis, the chief economist at Care Ratings, told DNA Money that he does not expect the government to slip up on the fiscal deficit as of now but "the question is whether or not any expenditure will be reduced or revenue stream not materialise...If at all there is a slippage, it will be on the revenue side and three areas need to be seen: GST collections, non-tax revenue in the form of dividends from PSUs and disinvestment." Sabnavis suggested that disinvestment be expedited despite the current market volatility and wants the government to introduce expenditure cuts on capex.

But India Ratings has estimated that the fiscal deficit will increase by Rs 39,900 crore this fiscal to take the deficit number to Rs 6.67 lakh crore against the budgeted Rs 6.24 lakh crore. "This translates into fiscal deficit/GDP of 3.5% for FY19 compared to the budgeted estimate of 3.3%." Earlier, rating agency Moody's had also warned of a fiscal slippage.

Ind-Ra's chief economist and head public finance Devendra Pant said the pressure on government finances was mainly arising from the revenue side, particularly from indirect taxes and non-tax revenue. He expects a revenue shortfall of Rs 22,400 crore from indirect taxes and added that with a large portion of indirect tax mop-up subsumed into the Goods and Services Tax (GST), aggregate indirect tax collections (union excise duties, customs, service tax and GST) grew only 4.3% during the April-September period of this fiscal against the budgeted growth of 22.2%.

Analysts at brokerage Macquarie also predicted that fiscal deficit would overshoot the target due to GST challenges and their estimate is 3.46% of GDP versus the 3.3% target. Macquarie said only 11% of the disinvestment target has been achieved till now and "despite the government's confidence, there could be 20% downside to its Rs 80,000 crore target. The government could rely on some big-ticket issuances like Coal India, ONGC, Axis Bank and ITC to come close to the target. Another option could be to push government-owned companies for large buybacks. It will be interesting to see if the government ends up doing something like the ONGC–HPCL deal to push up collections."

The recent excise duty cut on prices of petrol and diesel added 0.05% to the fiscal deficit at Rs 10,500 crore. But Macquarie analysts also said that direct tax collection could potentially surprise. "The government in its recent statement continued to reiterate that it is extremely confident in meeting its direct tax collection target of Rs 11.5 lakh crore. The first four months of direct tax collection appear underwhelming with personal tax growth of 10% and corporate tax growth of 1% only. However, we are not too perturbed as this is due to massive tax refunds issued in FY19 till date. The government refunded Rs 75,000 crore in 4 months, which is half of the entire refunds of FY19."

Meanwhile, Pant of India Ratings said that non-tax revenues are expected to be Rs 16,200 crore lower than the budgeted estimate of Rs 2.45 lakh crore. And the shortfall is likely to emanate from a) lower dividend/profit payout by the RBI/nationalised banks/financial institutions, b) lower non-tax revenue receipts from communication services c) lower disinvestment receipt. He said the RBI provided an interim dividend from their FY18 profits to the government in March 2018.

"As a result, the dividend receipt is likely to be lower in FY19. Nationalised banks too are struggling under the burden of non-performing assets." Pant further said that revenue expenditure growth in the first six months of this fiscal is marginally lower than the budgeted figure. "However, the situation is likely to change due to a steep increase in the minimum support price of kharif crops and the implementation of Ayushman Bharat."

FISCAL CHALLENGES

Rs 11.5L cr – direct tax collection target for this fiscal

Rs 6.24L cr – budgeted fiscal deficit target

Rs 22,400 cr – revenue shortfall seen by India Ratings