A big 9.4% shortfall in receipts even against the revised estimate of Rs 19.32 lakh crore announced during the Budget caused the Centre’s fiscal deficit to widen to 4.6% of the GDP in FY20, against 3.8% (RE) budgeted, according to the data released by the Controller General of Accounts on Friday. This was the highest level of deficit for the Centre since FY13, when it had stood at 4.8%.
On the receipts side, shortfalls occurred in both tax and non-tax inflows. With the Covid-19 pandemic hitting March collections hard, net tax receipts for FY20 stood at Rs 13.56 lakh crore, down 9.9% from the RE level. Also, with disinvestment plans going haywire amid adverse market conditions, non-debt capital receipts in last fiscal year were just Rs 68,620 crore, against RE of Rs 81,605 crore.
As far as expenditure is concerned, capital spending suffered, with the actual being Rs 3.37 lakh crore, versus RE of 3.48 lakh crore.
It may be noted that the revised estimates for tax collections were far lower than estimated at the beginning of the year (BE). In case of net tax receipts (post-transfers to the states), the RE of Rs 15.05 crore was 8.8% lower than the BE of Rs 16.49 lakh crore. In fact, the difference between BE and RE was even sharper for gross tax receipts; the increasing use of cesses and surcharges by the Centre enabled a lesser impact of the reduced tax buoyancy on NTR as opposed to that on gross tax receipts.
With the state governments also seen to report their combined fiscal deficit for FY20 to be higher than 2.6% of the GDP – the figure might turn out to be 3% or thereabouts — the consolidated fiscal deficit of the Centre and states in FY20 could be around 7.6% (Centre’s actual plus 3% of states).
In recent years, low tax buoyancy, coupled with the need for the government to prop up demand in the economy via its own spending given the languid private investments/consumption, forced the Centre to redraw the fiscal glide path it is wedded to. For instance, for FY19, the fiscal deficit was originally (BE) estimated at 3.3% but was revised to 3.4%; similarly, for FY20, the original target was 3.3%, but it was revised to 3.8% at the RE stage. Now, the actual figure is an even higher 4.6%.
The extent to which budget projections on tax collections are going awry is evident from the fact that, in case of net tax revenue, the actual figure is Rs 13.56 lakh crore or about 18% less than the BE.
Meanwhile, the consolidated budgeted fiscal deficits of the Centre and states are going to widen considerably, possibly to double digit level in the current financial year, given that economic growth this year is slated to be in the negative territory.
While tax receipts this year are likely to be way below the projected levels, a big expenditure cut at the aggregate level is unlikely, given the need to spend on Covind-19 management and the stimulus. There will be a re-formulation of expenditure components, but at the aggregate level, the spending could be a bit higher than the budgeted over Rs 30 lakh crore for FY21, compared with actual of Rs 26.86 lakh crore for FY20.
DK Srivastava, chief policy advisor at EY India, recently wrote: According to the recently revised Centre’s borrowing programme, the estimated fiscal deficit for FY21 stands at 5.7% of GDP. This may not be enough to cover both the shortfall in Centre’s budgeted tax revenues and the already announced fiscal stimulus. If there is no expenditure compression, Centre’s fiscal deficit may need to be increased to about 7% of the GDP. The state governments have also been allowed, subject to certain conditions, to enhance their borrowing from 3% to 5% of their respective GSDPs. Together, with the borrowing requirements of public sector undertakings of 3.5% of GDP, this adds up to 15.5% of GDP.”
SBI economists have estimated the general government fiscal deficit to be 13.3% (8.3% for the Centre and 5% for states) in FY21. As per Care Ratings, combined fiscal deficit of the Centre and states can be in the region of 11-12% in FY21.
According to the FRBM mandate, the Centre’s fiscal deficit is to be 3% of GDP, however, that has eluded in the past decade with resetting of the target multiple times. The fiscal deficit is now pegged to be 3.5% in FY21, before coming down to 3.1% in FY23. Obviously, these figures will have to be steeply revised now.