Revenue to disinvestment: Govt short of finances as it tries to fix economy

A study of the monthly trajectory of the government’s revenues and expenditure shows unprecedented stress in the economy. The government’s net revenue in the April-July period of 2020 contracted by 42 per cent, as its overall expenditure growth was kept at 11 per cent. Fiscal deficit has widened rapidly, as the government’s reliance on external sources to finance the deficit becomes an additional worry point. A K Bhattacharya explains the challenges the government’s challenges in fixing the economy as coronavirus cases continue to rise in the country.

A K Bhattacharya, Business Standard
8th September

How serious is the stress in the Union government’s finances and are there any signs that they may be on the mend?

The questions may appear to be odd and even counterfactual at a time when the latest numbers on the government’s fiscal deficit for the April-July 2020 period have exceeded the annual Budget target by 3 per cent. In April-June 2020, the fiscal deficit had already risen to about 83 per cent of the target for the full year.

Nevertheless, the questions still deserve to be asked.

The figures on government finances are based on monthly reports released by the Controller General of Accounts (CGA). But what gets highlighted and discussed are the cumulative numbers for the latest period for which the data is released. A study of the monthly trajectory of the government’s revenues and expenditure, therefore, may present a slightly different picture, providing different takeaways for policy makers and observers of the Indian economy.

Of course, the broader picture is one of an unprecedented stress, with the Centre’s net revenue in the April-July period of 2020 having contracted by 42 per cent, even though its overall expenditure growth was kept at 11 per cent. The Budget, presented in February 2020, had projected a net revenue growth of 20 per cent and an expenditure increase of 13 per cent over the provisional estimates of 2019-20. No surprise, then, that the fiscal deficit figure has already exceeded its annual projection.

But a closer study of the granular data on central government finances shows a month-on-month decline in the rate of contraction in its gross tax revenue collections. From a contraction of 44 per cent in April, the fall in gross tax collections was lower at 37 per cent in May, 23 per cent in June and 20 per cent in July.

The April-July contraction, therefore, was over 29 per cent, but it was still huge and nowhere near the annual 20 per cent growth that was projected for the full year. But the trajectory over the first four months of the current year indicates that the extent of the tax revenue shortfall, compared to the previous year, has been on a gradual decline as the economy has begun to open up from June onwards.

Burden on government finances

Can gross tax collections over the next eight months pare down the contraction level to zero, compared to a 29 per cent contraction in the first four months? Unlikely. And even if that were to happen, the gross tax revenue shortfall in the current year would be a little over Rs 4 trillion, compared to what the Budget target. That would still be a huge burden on government finances.

Barring excise, collections of all other taxes in this period have seen contraction in these four months. Excise collections, which are principally dependent on revenues from the oil sector, may appear to be a silver lining in such a gloomy scenario. With the government jacking up the excise duty on petroleum products significantly in the wake of falling crude oil prices, excise duty collections have already grown by 24 per cent in April-July 2020. That’s almost double the rate of growth projected for the full year. After a monthly contraction till May, the increase in excise collections have been substantial at 24 per cent in June and 82 per cent in July. Going by the current trend, it is likely that the year will end with total excise collections of over Rs 4 trillion, an increase almost 70 per cent.

Non-tax revenue collections, too, have seen a gradual decline in their contraction over the period of four months. In April, the decline was 75 per cent and by July it was down to a fall of just 10 per cent, making a cumulative contraction of 44 per cent.

Even here the task ahead is formidable. The Budget had projected non-tax revenues at Rs 3.85 trillion for the full year, an increase of 18 per cent over 2019-20. This was riding largely on an expected 125 per cent increase in spectrum fees from telecom companies to Rs 1.33 trillion in the current year. The latest verdict from the country’s apex court has put paid to such hopes. Even the flow of dividends from public sector enterprises, state-owned banks and the Reserve Bank of India is expected to be lower than the projections and will hugely disappoint the government.

Disinvestment disappointment

The bigger disappointment, of course, may come from the government’s disinvestment plans. It had planned to collect Rs 2.1 trillion during the current year, compared to Rs 50,000 crore in 2019-20. So far in the first four months of the year, only Rs 3 crore has been collected. The government’s disinvestment plans now look as uncertain as Covid-19.

Worryingly, the sharp spurt in the government’s capital expenditure in the first three months (about 40 per cent increase) has slowed down considerably. By the end of July, the increase in capital expenditure is only about 4 per cent.

This may be the result of the government’s response to control the ballooning deficit. Total expenditure growth in April-July 2020 has been reined in at 11 per cent, against the annual target of 13 per cent, but this has been possible largely because of a huge saving in the government’s major subsidies, which contracted by 38 per cent in this period. The annual increase in major subsidies was projected at 2 per cent.

But the saving on expenditure is a drop in the ocean. The government’s total net revenue between April and July 2020 has seen a monthly collection rate of Rs 0.58 trillion. If the government has to reach its Budgeted target of Rs 20.2 trillion by the end of the year, the monthly collection rate in the remaining eight months has to go up to Rs 2.23 trillion. This is unlikely. If it has to even reach the level of net revenue of Rs 16.8 trillion achieved in 2019-20, the monthly collection rate in the August-March 2020-21 period has to treble to Rs 1.81 trillion.

The government’s immediate goal seems to be to collect at least the revenue that it did in 2019-20. That would mean a revenue shortfall of Rs 3.4 trillion. The question is whether the additional borrowing of Rs 4 trillion will be enough to meet this shortfall and provide the additional stimulus that everyone expects the government to announce in the coming days.

Yes, the pace of contraction in the government gross tax revenue collections is on a decline, but the government’s woes on public finances are hardly over. Not only has the government’s fiscal deficit has widened rapidly, the reliance on external sources to finance the deficit could become an additional worry point. External financing in the April-July period of 2020 accounts for almost 5 per cent of the government’s total borrowing, up from just 1 per cent in the same period of 2019.

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A few links for further reading

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Don’t waste this crisis

The gross domestic product (GDP) growth numbers for the July-September quarter, the lowest in 26 quarters, are no surprise. Most analysts had — belatedly — forecast the bad news. It is now clear that if the government does not get its act together by Budget day, two months from now, a quick recovery from the current depths should not be expected. The economy is on a cusp from where it can swing either way. Nirmala Sitharaman is on test.

Fix the holes in your investments and insurance plans ahead of the new year

Make changes where required so that your investment and insurance portfolio are equipped to meet the rigours that 2020 may have to offer. With the year drawing to a close, your thoughts may have turned to taking a holiday and visiting a new destination. Or you may want to just curl up in a blanket and laze around by a bonfire. While you do deserve some rest after toiling for the entire year, one essential task you must not overlook is to check your financial portfolio and ensure it is in good shape.

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