The new finance minister Nirmala Sitharaman has two weeks to prepare the budget for fiscal year 2019-20 (FY20), which will be presented on 5 July. One of the things she needs to keep in mind is something, the former Reserve Bank of India governor, Y.V. Reddy, talks about in Advice and Dissent: My Life in Public Service. As he writes: “Once, Ruchir Sharma of Morgan Stanley said to me that a policy decision I had taken was inconsistent with the data. I told him, ‘In India not only the future but even the past is uncertain’.”
Reddy was basically talking about the problem of “variations between estimates and revised estimates” in India being large and the fact that “revisions (of data) are made very often”. Of course, Reddy’s quip about even the past being uncertain in India was more about data required to run successful monetary policy.
Having said that, the fact that a lot of data in India is unreliable is true even for the nation’s fiscal policy. This is something that can be easily said at least for the last fiscal year. Let’s take a look at Table 1, which basically lists the taxes the government had hoped to earn when the then finance minister Arun Jaitley presented the budget for fiscal year 2018-19 (FY19) in February 2018 (budget estimates). It also lists the revised estimates when Piyush Goyal stepped in for Jaitley and presented the interim budget for FY20 in February (revised estimates). And finally, it lists the actual taxes earned by the centre in FY19, as per data released by the Controller General of Accounts (CGA) at the end of May.
Take the case of the central good and services tax (GST). The government had hoped to earn ₹6.04 trillion when the budget was originally presented in February 2018. This number was brought down to ₹5.04 trillion in February 2019. The final central GST collections came in even lower at ₹4.58 trillion. This was 24% lower than what was originally envisaged. Something similar happened with the income tax collected by the government as well. When the budget was originally presented the government had hoped to earn ₹5.29 trillion. It finally ended up earning a much lower ₹4.67 trillion.
The Union excise duty collections were also slightly lower than originally hoped. In case of corporation tax (income tax paid by corporates) and customs duty, the collections were a little above than what was originally projected, but below the revised estimates of February 2019. Corporation tax, income tax and central GST are the three taxes which bring in a bulk of the money earned by the government during the course of the year. In FY19, the final taxes collected in two out of the three of these taxes was totally out of whack from the number originally envisaged. The only possible explanation for this lies in the fact that the tax babulog (officials) made overtly optimistic projections.
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Same old story
Take a look at Table 2. It lists the details of the various taxes earned by the government in FY19 and the taxes it hopes to earn in FY20, as per the interim budget presented in February earlier this year (budget estimates). If the government has to earn the income tax that it has projected, the tax collected in FY20 will have to go up by more than 34%. In case of central GST, the taxes collected will have to go up by a third. In case of customs duty, the jump will have to be more than 23%.
These are stiff targets when the broader economy is slowing down. The economic growth during the period January to March 2019 came in at a thirteen-quarter low of 9.4% (in nominal terms not adjusted for inflation). The real time economic indicators clearly suggest that slow growth continues and will remain the order of the day in the months to come. In such a period, assuming that taxes will jump at the rates shown in Table 2 just doesn’t make sense. When Sitharaman presents her maiden budget in July, she will have to ensure that the total taxes the government hopes to collect in FY20 are tempered down majorly from the interim budget levels to much more realistic levels.
Of course, trying to collect more taxes from an economy which is slowing down is always a bad idea. On the flip side, there is great pressure on the government to spend more in order to give a little push upwards to an economy that is slowing down. In politics, it is more important to be seen to be doing things than let things sort itself out. Greater spending on part of the government is one of these things where the government is seen to be doing something to push growth in a rather moribund economy.
The trouble is that the greater spending on part of the government can only happen if the government taxes more or it borrows more. If the government taxes more to spend more, it leaves a lesser amount of money in the hands of people, and in a way, this negates the very idea of government spending more.
The FCI headaches
There are several other headaches that her predecessors have left for Sitharaman. In FY19, the fiscal deficit of the government stood at 3.4% of the gross domestic product (GDP) against the targeted 3.3%. Fiscal deficit is the difference between what a government earns and what it spends, expressed as a percentage of the economic size of a country (i.e. the GDP).
A fiscal deficit of 3.4% was achieved despite the fact that taxes collected were nowhere near against what they were originally expected to be. If we look at Table 1, the five major taxes were expected to bring in ₹21.26 trillion for the government. The taxes ultimately brought in around ₹19.32 trillion, which was₹1.94 trillion or 9.1% lower. Despite this, the government managed to more or less achieve the fiscal deficit it had originally hoped to.
How did this happen? Some accounting jugglery helped. The amount allocated towards food subsidies had stood at ₹1.69 trillion when Jaitley had presented the budget in February 2018. This was revised to ₹1.71 trillion when Goyal presented the interim budget in February earlier this year. The final food subsidy number for FY19, as per the numbers released by the CGA, was at ₹1.02 trillion, much lower than the original estimate.
Due to this, the government managed to lower its expenditure by around ₹700 billion, which played a major role in helping the government more or less maintain the fiscal deficit of 3.4% of the GDP. Food subsidy is primarily given to the Food Corporation of India (FCI).
The FCI buys rice and wheat directly from farmers at a certain price and sells it through the public distribution system at a much lower price, to meet the needs of food security. The government compensates the FCI for these under-recoveries. This money comes from the food subsidy allocated in the budget.
Over the past many years, the government hasn’t been adequately compensating the FCI. In FY19, the FCI’s total food subsidy to be claimed stood at ₹2.61 trillion. This included net food subsidy of ₹1.25 trillion for the year and ₹1.36 trillion of arrears from past years. The government has allocated only₹1.02 trillion towards food subsidy this year. The FCI’s share will be lower than the total food subsidy. This means that the FCI will have a carry-over liability of more than ₹1.6 trillion this year.
Here’s the thing. In order to continue to be in operation, the FCI will have to borrow this humongous amount of money and more, to continue financing its past as well as future operations. As of 31 March 2019, the FCI had borrowed ₹1.86 trillion from the National Small Savings Fund (NSSF). These borrowings had stood at ₹700 billion as of March 2017 and zero before that. All deposits under the small savings schemes are credited under the NSSF.
A bulk of this borrowing should basically be shown as expenditure on the books of the government of India. Given that the government does not pay the FCI on time and keeps its expenditure in control, it manages to push this expenditure on to the books of the FCI as debt. Also, it is worth mentioning here that the government runs a cash accounting system and unless any money leaves its accounts, it is not counted as expenditure.
If the money that needs to be paid to the FCI is actually included in the government expenditure, the fiscal deficit of the government will go up to more than 4% of the GDP. The major aim of any government budget should be to present a correct set of accounts. Over the last decade, that is something that has rarely happened. Given that things are already extremely stretched on the financial front, chances that this accounting shenanigan will be set right in this budget is more or less non-existent.
There are other ticking time bombs. The government spent₹2.06 trillion in recapitalizing public sector banks (PSBs) over the last two fiscal years. In the interim budget, the total amount of money allocated towards recapitalization of these banks is just ₹2 lakh. As of December 2018, the bad loans of these banks stood at ₹8.64 trillion and the recovery rates continued to remain abysmal. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more. In this situation, it is but natural that the government-run banks will need to keep writing off loans against their profit and capital, and will need further recapitalization from the government to keep going. Chances are more government capital will be needed this year as well. Hence, an allocation of just ₹2 lakh, which was the allocation made in the interim budget, will not be enough and needs to be corrected.
Finally, disinvestment of public sector enterprises remains a very important source of revenue for the government. In FY19, the government earned ₹850.45 billion from this. A substantial chunk of this was obtained through selling a stake in one public sector company to another.
This is a habit that the government should rid itself of.
Clearly, Sitharaman’s budget will perhaps be one of the most difficult budgets to be presented in many years. The economy is in poor shape and so are the government finances. It will be interesting to see what sort of balancing act India’s first full-time woman finance minister is able to carry out.