Why the take on the state of the economy and fiscal deficit sounds too optimistic

Ever since the provisional actual figures for FY19 were released by the Controller General of Accounts some time ago, economists have been busy figuring out how the Centre will manage to achieve the magic 3.4 per cent fiscal deficit number for FY20 (set out in the Interim Budget). Given that the Centre had to slash its expenditure for FY19 by ₹1.45 lakh crore (from the revised estimates), owing to a shortfall of ₹1.67 lakh crore in tax revenues, meeting the budgeted figures for FY20, as it stands, is a tall task.

But rather than delve deep into the wider implications of the huge shortfall in the income tax collections and the GST, the Survey has only made a perfunctory reference to the GST and glossed over the yawning gap in income tax collections.

Instead, it has made a somewhat laudatory reference to the quality of expenditure improving, with the share of capital expenditure inching up in 2018-19.

The Survey also paints a rather sanguine picture of the state of the economy, pegging the growth at 7 per cent (real GDP) for FY20, slightly higher than the 6.8 per cent reported in FY19.

These assumptions are too optimistic for comfort.

Understating fiscal deficit

It is true that the chunk of the reduction in expenditure to meet the FY19 fiscal deficit target has come about in revenue expenditure rather than capital expenditure. This has resulted in the share of capital expenditure in total expenditure inching up in 2018-19.

But this does not necessarily imply that the quality of expenditure has improved. A longer, three-year trend would reveal that the share of capital expenditure in the total has in fact fallen from 14 per cent levels to 13 per cent and thereabouts now.

The 15 per cent growth in capital expenditure in FY19 comes on top of a low base in FY18, when it shrunk by 7.5 per cent. Also, as a percentage of the GDP, the capital expenditure has actually moved lower to 1.6 per cent from 1.8 per cent in FY16.

There is more than what meets the eye when it comes to the reduction in revenue expenditure that the Survey states optimistically.

Meeting the food subsidy

A major portion of the Centre’s reduction in revenue expenditure in FY19 has come from crimping on food subsidies (by about ₹69,000 crore). The Centre had budgeted for ₹1.7-lakh crore of food subsidy for FY19.

With the Centre not able to foot the budgeted food subsidy, the Food Corporation of India (FCI) took an additional loan (of ₹60,000 crore) in FY19 from the National Small Savings Fund (NSSF). FCI’s total outstanding loan from NSSF stood at ₹1.86 lakh crore in FY19, up from ₹70,000 crore in FY17.

This is the third year that the FCI has resorted to an NSSF loan.

Small savings, big help

The government has been dipping into the pool of small savings fund to finance its fiscal deficit and also to fund the needs of public institutions.

From ₹12,357 crore in FY14, financing through small savings jumped to a little over ₹1 lakh crore in FY18. In FY19, as against the budgeted ₹75,000 crore, the Centre borrowed ₹1,25,000 crore (as per the Interim Budget).

The increasing reliance on the NSSF has resulted in the understatement of the fiscal deficit number over the years, and such financing comes at a high cost.

It must be kept in mind that the small savings rate is kept high to ensure adequate flows into small savings.

What is additionally worrisome is the increasing reliance of the Centre on off-balance sheet borrowing — the Internal and Extra Budgetary Resources (IEBR) — in recent years to fund its capital expenditure. From ₹2.5-lakh crore in FY16, the IEBR has shot up to over ₹5 lakh over the past two years. The Survey only makes a cursory mention of the IEBR.

Green shoots, really?

Despite noting the downside risks to consumption and export growth, the Survey projects a higher growth for the economy in FY20.

Perhaps the early signs of recovery in fixed investment growth, which the Survey alludes to could be one of the reasons for the sanguine growth projection.

But while the Survey notes the increase in growth of gross fixed capital formation from 9.3 per cent in 2017-18 to 10 per cent in 2018-19, it misses out on the declining trend in recent quarters, not to mention the steep fall to 3.6 per cent in the March quarter.

The Survey also draws comfort from the pick-up in credit growth. But given that the bank-credit growth to the industry has been in single digits since FY15 (it also recorded a flat to negative growth in the last two fiscals), a growth of 7 per cent in FY19 is not convincing enough to claim green shoots in investment activity.

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