Why the fiscal math may not add up

Poor dividends from the RBI and risks to growth can upset the fisc

When the Centre’s demonetisation move to crack down on black money unfolded, many believed that an inconspicuous windfall gain was in the offing. If part of the old notes did not come back into circulation, the reduction in the RBI’s liabilities could result in a one-time special dividend to the Centre, lowering fiscal deficit.

Instead, the RBI has robbed the Centre of nearly ₹35,000 crore of revenues this year. The fiscal deficit target of 3.2 per cent for FY18, that already seemed difficult to achieve, given the weak link in GDP growth estimates, can slip further on account of shortfall in revenues.

The Centre’s accounts up to June 2017, reveal that 30 per cent of the budgeted expenditure for FY-18 has already been done. In effect, the Centre’s fiscal deficit is already 80 per cent of the budgeted ₹5.46 lakh crore for FY-18. While higher pace of income tax collections can fill the Centre’s coffers, it may not be enough to plug the shortfall from the RBI’s poor doleout.

The story so far

In pegging the growth estimate of 12.7 per cent in tax receipts (net to centre) for FY-18, , the Centre assumes a rather conservative forecast of around 8.8 for indirect taxes, which is credible. The Budget had put out a more optimistic forecast for income tax collections that are expected to grow by 25 per cent (23 per cent in 2016-17), taking into account the additional tax revenues from the income declaration schemes announced last year, which is no doubt achievable.

There has also been a substantial increase in the number of income tax returns filed, thanks to the Centre’s drive to fight black money. The number of returns filed (as on August 5, 2017) has shot up by 24.7 per cent over the previous year. Advance tax collections of personal income tax has also seen a robust 42 per cent growth. Widening of the tax base could lead to a notable increase in collections, over and above the Centre’s initial estimate.

But non-tax revenues could fall short of the Centre’s earlier estimates. The budget assumes ₹46,500 crore divestment proceeds from stake sales in PSUs and ₹15,000 crore by way of strategic sales. Another ₹11,000 crore has been factored in by way of listing of insurance companies. After setting a target of ₹56,500 crore in the 2016-17 Budget, the Centre raised about ₹45,500 crore in 2016-17 by way of disinvestments.

According to a government release, about ₹9,300 crore has been raised so far through divestment in FY-18. The ETF (exchange traded fund) mechanism has proven to be an effective way for the government to help meet its disinvestment targets. Bharat 22, the newly announced ETF by the Centre to divest its stake in 22 state-run and private firms, looks promising. While the divestment target for the coming fiscal is not aggressive, there could be some slippages.

But it is the dividends from public sector enterprises, the RBI, PSU banks and financial institutions that constitute a chunk of the Centre’s non-tax revenues. The ₹65,876 crore of surplus that the RBI transferred to the Centre last year, constituted about a fourth of the non-tax revenues in FY-17. The RBI halving the doleout to ₹30,659 crore this year, can cost the Centre dear. Since 2013-14, the entire surplus in the RBI’s coffers amounting to ₹50,000-65,000 crore has been transferred to the Centre. Interestingly, though, there could be a marginal windfall gain this year from other quarters, if dividends declared by listed public sector companies and PSU banks are any indication. Thanks to companies such as ONGC, IOCL, BPCL and HPCL, the Centre’s revenues could get a boost of over ₹5,000 crore. Based on data of listed companies, the dividend received by the Centre has gone up from about ₹37,000 crore in FY-16 to ₹42,000 crore in FY-17 (which will be accounted in the Centre’s non-tax revenues for FY-18).

Despite the poor show by PSU banks in the FY-17 fiscal, dividends have inched up by a couple of hundred crores. Banks such as Bank of Baroda and Canara Bank that moved into the black in FY-17 have dutifully paid their dues to the Centre.

However, these dividends will only add a few thousand crores to the Centre’s kitty this year. A bumper income tax collection is the Centre’s only hope to make good the shortfall created by the RBI’s poor support.

Growth concerns

The 3.2 per cent fiscal deficit target could also slip, if the underlying assumption for growth in GDP for 2017-18 falters. The mid-year economic survey has cited various downside risks to the Centre’s earlier estimate of 6.75-7.5 per cent growth in real GDP for FY-18. The Survey also suggests that given the recent trends, inflation could well slip below the RBI’s medium-term target of 4 per cent.

Given all of this, the forecast of 11.75 per cent growth in nominal GDP for FY-18 (reiterated in the Medium Term Expenditure Framework Statement), appears aggressive, and could throw the fiscal deficit ratio out of whack.

Even if one were to assume, the lower 6.75 per cent growth in real GDP for FY18, then the growth in deflator (ratio of nominal to real GDP) — another measure of inflation — works out to around 4.6 per cent, up from 3.5 per cent in 2016-17. This appears aggressive considering the underlying CPI/WPI trends. The 3.2 per cent fiscal deficit target is no doubt a number to envy as is the 3 per cent figure for the next two years set out in the Medium Term Expenditure Framework Statement, on a higher nominal GDP growth expectation of 12.3 per cent. But given the persisting growth challenges, the fiscal outlook for the current fiscal, in particular, remains uncertain.

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