In the Union Budget for 2020-21, Finance Minister, Nirmala Sitharaman revised the fiscal deficit [FD] for 2019-20 to 3.8% of GDP – up from the budget estimate [BE] 3.3%. In absolute term, the RE is Rs 766,500 crore against BE Rs 700,000 crore.
Sitharaman has explained away the slippage in terms of recommendation of the NK Singh committee on review of the Fiscal Responsibility and Budget Management [FRBM] Act which permits breach of the target in case of “far reaching structural reforms with unanticipated fiscal implications”. The justification is untenable as during the year, there was no reform measure that can be put in the category of ‘far reaching structural reforms’.
The government could slip further even from the revised [albeit higher] figure. According to official data released on February 28, 2020, the FD during the first 10 months up to January, 2020 was Rs 985,000 crore or 128.5% of the RE. The collections are trailing behind in respect of both tax and non-tax revenue.
In the 2019-20 budget, FM had estimated gross tax receipts [GTR] at Rs 2460,000 crore of which about Rs 1600,000 crore was to accrue to the centre. The GTR – RE is already down to Rs 2160,000 crore, corresponding accrual to the centre being Rs 1400,000 crore. Even this drastically reduced number is nowhere in sight.
During 10 months up to January, 2020, GTR is Rs 1530,000 crore. After transfer of Rs 5,30,000 crore to states as ‘Devolution of Share of Taxes’, the centre will be left with only Rs 1000,000 crore. Garnering Rs 200,000 crore in February and March each – needed to reach RE [read: Rs 1400,000 crore] – is well nigh impossible. Going by the trend, shortfall of at least Rs 200,000 crore is inevitable.
Meanwhile, in a desperate bid to make up, the government has launched ‘Vivad se Vishwas’ [VSV]. Under the scheme that will run till June 30, 2020, beneficiaries can pay disputed tax arrears without interest and penalty if paid before March 31, 2020. If, the beneficiary pays the amount after March 31, 2020 but before June 30, 2020, then, he will be need to pay 10% extra. In case, the tax dispute is over penalty, interest or fee, the settlement amount payable is 25% of the dues if paid before March 31, 2020. According to the Parliament Standing Committee on Finance, there are close to 500,000 cases involving demand under litigation of about Rs 996,000 crore.
Under a similar scheme ‘Sabka Vishwas’ Scheme [SVS] on unresolved disputes relating to excise and service tax [under the erstwhile dispensation prior to GST] launched on September 1, 2019, the government had garnered Rs 38,000 crore or 15% of amount under dispute. Therein, nearly 95% of tax payers came forward because they were given waiver up to 70% of the demand, in certain cases. In sharp contrast, under VSV, the litigants are required to pay the entire amount under dispute. Hence, they won’t avail.
In regard to proceeds from disinvestment [a major item of non-tax proceeds], in July 2019, Sitharaman had budgeted for Rs 105,000 crore. Against this, RE is Rs 40,000 crore short or Rs 65,000 crore. Against this, collection up to January, 2020 is only Rs 18,000 crore. It is highly unlikely that the shortfall of Rs 47,000 crore will be made up during the remaining two months. Together with shortfall in tax collection, we are staring at an additional deficit of about Rs 250,000 crore which will add 1.2% to the RE of 3.8%.
The reported FD does not capture the deferred subsidy payments [DSPs] i.e. payments which are due in a given year but deferred to the succeeding year [courtesy, a flawed accounting method which recognizes payments when made]. During 2019-20, DSPs are food subsidy: Rs 110,000 crore; fertilizer subsidy: Rs 70,000 crore and fuel subsidy: Rs 30,000 crore adding to Rs 210,000 crore. In the 2020-21 budget, FM acknowledges these [in an annexure] but does not reflect in numbers. This causes further slippage of 1%.
The figures also don’t include extra-budgetary resources [EBRs] – a euphemism for borrowings by agencies and PSUs such as National Highways Authority of India [NHAI] made on behalf of the sovereign government – though recognized. On inclusion, EBRs will further escalate the FD.
For 2020-21, Sitharaman has estimated FD at 3.5% against 3.0% required under FRBM Act. This is based on GTR of Rs 2423,000 crore which is more or less the same as BE for 2019-20. The corresponding accrual to centre is about Rs 1575,000 crore which is Rs 175,000 crore higher than 2019-20 [RE] Rs 1400,000 crore. When, compared to likely actual for 2019-20 of about Rs 1200,000 crore, the government is looking for an increase of Rs 375,000 crore or 31%!
On the other hand, allocation for subsidies is much short of requirements; under-provision being food subsidy: Rs 103,000 crore; fertilizer subsidy: Rs 80,000 crore.
The target for proceeds of divestment at Rs 210,000 crore is also unrealistic; all the more when one considers the impending slowdown in global economy – accentuated by the Corona virus outbreak – and Indian economy projected to remain sluggish which has dimmed chances of ‘strategic sale’ in particular.
As a consequence, even 2020-21 will end up with deficit of at least 6% – against 3.5% projected in the budget.
It would appear that the government having decided on a target, it takes recourse to all sorts of tactics such as inflated tax revenue projection, DSPs, EBRs, dividend payments by PSUs etc to somehow achieve it. This practice should be shunned. It needs to focus on ‘expenditure reforms’ to bring about sustainable reduction in spending especially major subsidies. There is also dire need for reforms in tax systems. Studies show that only a fraction of high income earners pay tax. This anomaly must be corrected.
While, dealing with honest tax payers in a ‘fair’ and ‘transparent’ manner [and even reward them], the government should deal with evaders sternly ensuring that the latter don’t use loopholes in the law to evade the taxman. Even more crucial, the courts should give their orders on tax disputes in fast track mode [Rs 996,000 crore locked in direct tax disputes says it all]
Sans these reforms, any amount of window dressing of numbers or remaining in denial mode will do no good to improving the financial health of the Union Budget.