MACROSCAN. Smoke, mirrors and some number shifting

According to the Government’s Chief Economic Adviser, Finance Minister Arun Jaitley is a magician. He surely does seem to be one, because he has managed to achieve the apparently impossible feat of keeping to his fiscal deficit target (of 3.9 per cent of GDP) in a period when various other indicators suggest slowing economic activity and reduced possibilities for revenue collection.

And furthermore he has declared his intention of going further along this route in the coming fiscal year, by bringing the fiscal deficit down to 3.5 per cent of GDP, notwithstanding the global headwinds.

How did he achieve this feat? Well, professional magicians work with smoke and mirrors, sleight of hand and fancy footwork. In accounting terms, there is a lot of that evident in this year’s Budget documents.

In expenditure terms, for example, much of the greatly hyped increase in budgetary allocation to agriculture results from the simple shifting of one item (the interest subsidy paid to banks for credit to agriculture) from the Ministry of Finance head to the Ministry of Agriculture.

This results in an increase in that Ministry’s spending of ₹15,000 crore, thereby creating the illusion of much greater public expenditure on agriculture even with no change at all on the ground.

But for the real magic, we have to look at the revenue figures, especially since those are what the Finance Minister is relying upon to deliver for him even in the coming year.

Chart 1 shows how the government’s total tax revenues in the current year are currently projected to be slightly higher than what was budgeted for. This is surprising, as it is widely known that corporate tax collections have been well below expectations so far. And with imports falling by around 15 per cent in the course of the year, it should be unlikely for the government to get the expected customs revenues.

Indeed, it is evident from Chart 1 that receipts of both forms of direct taxes – corporation tax and personal incomes tax have been significantly lower than expected in last year’s Budget, with the difference as great as nearly ₹46,000 crore.

So how did total tax revenues increase slightly? Essentially because of a substantial (and surprising) increase in indirect tax collection.

Customs duty collections remained strong, indeed slightly higher than anticipated, despite the massive drop in imports.

Even more remarkably, union excise duties showed a really dramatic increase of ₹55,334 crore despite no evidence of accelerated industrial production or goods freight traffic. How did this happen?

Chart 2 reveals the story behind the mystery. Essentially, the Centre took advantage of the lower global oil prices to keep hiking the various excise duties on petroleum products.

In addition to the basic and special excise duties on motor spirit and high speed diesel oil, there were additional excise duties levied on both items as well as a special additional duty on motor spirit.

There was also a cess levied on crude oil. These measures meant that Indian consumers barely got any benefit from the fall in world oil prices — but they did become a massive windfall for the government. The difference in terms of budgeted and revised estimates of excise duties on these POL products amounted to as much as ₹₹76,385 crore.

This was more than enough to counter the shortfall in collection of other excise duties, so that total excise duty receipts increased by more than ₹54, 334 crore.

This refusal to pass on the benefits of lower oil prices to consumers (which would have had an impact in terms of lower food prices as well, since energy costs are so significant in the production and distribution of food) was not the only trick Jaitley had up his sleeve. The other move was to shift a lot of additional taxation to cesses and surcharges rather than increasing tax rates.

This gave the central government the huge benefit of not having to share the revenue collected with states, unlike all other taxes that are subject to Finance Commission awards.

Chart 2 also shows how cesses have played an important role in the total receipts. It is true that the collections in this regard were slightly less than anticipated, mainly because other excise duty revenues (those not on oil products) were not as high as expected in last year’s Budget.

This shift at the margin from taxes to cesses has meant that the share of the central government in total tax collection, which was estimated to be 63.7 per cent in last year’s budget, has actually been higher at 65.4 per cent.

Since the Budget for the coming year also projects a similar share for the Centre, and indeed the Budget proposals are peppered with new cesses of various kinds, Jaitley clearly believes that this is an easy way to grab a greater share of the federal tax cake.

The other source of revenue that has delivered for Jaitley in the current fiscal year is non-tax revenues.

As Chart 3 indicates, two categories in particular have been more buoyant than expected. Dividends and profits received by the Centre have been higher by nearly ₹18,000 crore. This comprises firstly of the dividends and profits of Public Sector Enterprises and other investments, which at ₹36,174 crore were nearly ₹5,000 crore higher than expected.

Secondly the dividend/surplus of the Reserve Bank of India and other nationalised banks and financial institutions, at ₹64,477 crore, washigher than the figure budgeted for by more than ₹6,000 crore, mainly because of the RBI’s surpluses.

Meanwhile other non-tax revenues also increased, dominated by receipts from “other communication services”.

This refers largely to receipts from one-time spectrum charges, auction of 1,800 MHz and 900 MHz spectrum and receipts from 800 MHz spectrum.

Receipts under this head rose from ₹30,624 crore in 2014-15 to ₹56,034.35 crore in 2015-16, and are estimated at ₹98,995 crore in the budget for 2016-17. As a result, the income from “economic services” came to as much as ₹92,324 crore in 2015-16, or around ₹18,000 more than was budgeted for, and is slated to rise to a huge ₹1,41,451 crore.

These can be seen as windfall incomes, but in any case even as part of a fiscal strategy, in the current fiscal year they were dependent upon very specific conditions that enabled Jaitley to display his skills as a magician.

However, judging by the Budget estimates he has just presented this week, he appears to think that he can replicate this and even surpass it in the coming year.

To actually manage this, he will need, along with his bag of magician’s tricks, a very large helping of luck.

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