Analysis. Fiscal situation not as alarming as it appears

The Union Budget for FY2017 had projected a small decline in the Government of India’s (GoI’s) fiscal deficit to ₹5,339 billion in the current year, from ₹5,351 billion in FY2016, according to the Revised Estimates (RE) for that year.

Since absolute numbers are often difficult to put into context, the fiscal deficit is usually measured relative to the size of the economy, to assess the size of the fiscal gap across countries and over periods of time.

When seen through the lens of this metric, the GoI’s fiscal deficit was forecast to correct to 3.5 per cent in the Budget Estimates (BE) for FY-2017 from 3.9 per cent in the previous year.

The extent of fiscal consolidation being attempted is even more ambitious, given the revision in pay scales, following the recommendations of the Seventh Central Pay Commission (SCPC), the cost of which is estimated at around 0.4 per cent of GDP.

We now have access to fiscal data for the first half of FY2017, a good juncture to evaluate whether trends are evolving in line with the budgeted targets.

The GoI’s fiscal deficit printed at ₹4,480 billion in H1 FY2017, 18.3 per cent higher than the level in H1 FY2016. Moreover, a significant 84 per cent of the FY2017 BE for the fiscal deficit had been appropriated in the first six months of the fiscal, comparable to the 83 per cent in H1 FY2015 and considerably inferior to the 68 per cent recorded in H1 FY2016.

With limited headroom for the second half of the year, the fiscal situation is far from comfortable. However, mid-year assessments often appear more alarming than the reality, as several revenue streams are disproportionately higher in the second half of the year.

For instance, only 40 per cent of the gross tax collections of the GoI have accrued in the first half of the fiscal over the recent years. In H1 FY2017, the GoI’s gross tax revenues expanded by 17 per cent, faster than the 12 per cent growth envisaged in FY2017 BE.

This benefited from factors such as the up-fronting of the payment schedule for advance tax on personal income tax as well as the impact of excise hikes on petrol and diesel undertaken in November 2015-January 2016, the impact of which would fade in H2. However, as consumption ratchets up following the pay revision and the kharif harvest, direct and indirect taxes are likely to record some buoyancy.

Moreover, with income in excess of ₹650 billion having been declared under the income disclosure scheme, 45 per cent of this amount has to be remitted to the GoI in the form of tax, surcharge and penalty in three tranches (25 per cent each by the end of November 2016 and March 2017, and the balance by September 2017), which would boost the GoI’s direct tax collections.

Additionally, the withdrawal of legal tender status for the existing currency notes in the denominations of ₹500 and ₹1,000 may help to bring forth previously unaccounted for income into the formal channels, which would provide some boost to the GoI’s tax collections.

The non-tax revenues and disinvestment inflows accumulated up to September 2016 are also not representative of the likely full year trends. Following the conclusion of the telecom spectrum auction, an upfront payment of around ₹320 billion would flow to the GoI during October 2016.

Although this amount is lower than what was budgeted for FY2017, the GoI may well choose to re-auction some of the unsold spectrum to raise additional funds.

A limited ₹60 billion was raised during H1 FY2017, as compared to the budget targets of raising ₹360 billion as receipts from disinvestment of the GoI’s stake in PSUs and ₹205 billion from strategic divestment.

Benefiting from buybacks of the GoI’s stake in various PSUs, the aggregate inflows have risen appreciably to ₹214 billion by the end of October 2016. Moreover, the sale of the GoI’s stake in SUUTI could garner substantial funds in the remainder of the year.

Notably, revenue expenditure rose by 14.1 per cent in H1 FY2017, higher than the 12.5 per cent growth targeted in the BE for FY2017, partly on account of the up-fronting of food subsidy expenditure.

The cost of the SCPC in the current fiscal to be borne by the Union Budget is estimated at ₹600 billion, which does not appear to have been fully budgeted for in the BE for FY2017.

The quality of the fiscal deficit as well as the growth impulses will be influenced by the nature of the expenditure cuts — whether they are instituted on the revenue or the capital spending.

The writer is Senior Economist, ICRA Limited

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