India Economy

A tightrope walk on fiscal deficit target

Deepak Jasani | Updated on March 18, 2018

Populist spends, higher inflation and lower GST collections could upset the applecart

Fiscal deficit in India is one of the most widely tracked macro-economic indicators due to its implications on government spending, revenues, inflation, interest rates and currency movements. In the Budget, India's fiscal deficit was revised higher to 3.5 per cent for fiscal 2018 (against 3.2 per cent estimated earlier) and 3.3 per cent for fiscal 2019 (3 per cent estimated earlier). This pushed the 3 per cent target back to 2020-21. Will the government be able to meet its fiscal deficit target for 2019?

Optimistic assumptions

The target for 2017-18 was missed partly triggered by introduction of GST. After the Centre’s breach by 30 basis points from the budgeted estimates, 12 States (accounting for 57 per cent of India’s GDP) have exceeded their 2017-18 budgeted gross fiscal deficit target of 2.7 per cent of GSDP by 36 basis points. India’s high consolidated fiscal deficit (led by deteriorating state fiscals) ranks the second highest among major economies.

While setting the 2018-19 target of 3.3 per cent of the GDP, the government has made certain assumptions which seem optimistic . The target for GST (Centre’s share) is pegged at ₹740,000 crore on expectations of improved compliance and increase in tax base — 67 per cent higher than the revised estimates of 2017-18.

However, on a like-to-like basis (similar number of months and excluding compensation cess), the growth comes to 14-16 per cent, not too different from the growth rates assumed in the past few years. Against the average monthly run-rate for July-December 2017 of around ₹90,200 crore (State, Centre share together), the required run rate for FY19 will be ₹112,000 crore, a growth of 24 per cent. Excluding compensation cess, this comes to about 16 per cent. GST collections for month of January 2018 were at ₹86,300 crore.

In the light of this, to achieve the fiscal deficit target next year, it is vital that the government successfully implements measures such as e-way bill, invoice matching, streamlining of GST filing mechanisms, greater formalisation of the economy and continues with anti-evasion measures.

Besides, for 2018-19, fuel subsidies have been kept almost unchanged (higher by 2 per cent). Unless crude prices start correcting, the government may have to take a hit by either higher subsidies or lower tax collections (due to cut in excise on petrol/diesel). Revision in minimum support prices (MSPs) for food crops could lead to high burden on the exchequer.

Tailwinds and headwinds

The Budget assumes 11.5 per cent nominal GDP growth for 2018-19 against the growth of 9.7 per cent achieved in 2017-18 (revised estimates). The GDP growth seems to have bottomed out going by the numbers for the last three quarters. A buoyant global trade environment, a stable (not appreciating) rupee and a good monsoon in 2018 will help further. Achieving the assumed growth in the economy is crucial for reaching indirect tax estimates. In addition, given that the other expenditure heads are sticky, there is a tendency for the government to cut capital expenditure (capex) to meet the fiscal deficit target. It would be critical that the government meets its budgeted capital expenditure target, especially at a time when private capex is not picking up.

We think the government may not resort to apparently populist measures in an election year unless the monsoon is short of expectations. Additional provision for PSU banks’ recap, if routed through budgetary allocation, would increase the burden on the fiscal situation.

The key factors to assess the risks to macro stability would be inflation , trends in GST collections and economic growth.

With the current global slowdown, most of the countries have been witnessing increase in fiscal deficit. Though this can be a consolation, we cannot afford to witness widening fiscal deficit year after year.

The government has options to raise additional revenues to bridge the widening deficit. It can sell stakes in government companies more aggressively as against the targeted figure of ₹80,000 crore in 2018-19. However, the practice of treating disinvestment proceeds as revenue should be discontinued as these can be one-time, lumpy and unreliable sources of revenue, and family silver should be used only to bring down the government debt and protect the future generations.

While achieving 3.3 per cent seems a tightrope walk due to the above factors, the overflow may be contained within 20 basis points, which may not be seen too negatively by investors.

The writer is Head -Retail Research, HDFC Securities

Published on March 18, 2018

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