The Fiscal Deficit Math That You Don’t See
We now have a situation where fiscal policy could be significantly more expansionary than we care to admit, warns Ananth Narayan.
As per the revised estimates for the fiscal year 2018-19 released on Feb. 1, the Finance Ministry expects to marginally exceed its tax receipt budget of Rs 14.8 lakh crore with a healthy 19.1 percent year-on-year increase. However, the Controller General of Accounts data shows that tax receipts for 10 months of FY19 till January 2019 are at Rs 10.2 lakh crore, just 4.7 percent higher on a year-on-year basis.
We need an incredible 73 percent year-on-year growth in tax revenues in the last two months of FY19 to meet the revised estimate of 19.1 percent full-year growth in central tax receipts. Even if tax receipts in the last two months register a generous 25 percent year-on-year growth, full year tax receipts will still end short of revised estimates by Rs 1.3 lakh crore.
Instead, if the current trend of 4.7 percent growth in tax receipts continues, we will end the year Rs 1.8 lakh crore short of revised estimates – nearly 1 percent of GDP.
Yesterday Once More
We saw a similar trend of optimistic revised estimates of revenues last year as well. In the FY19 budget presented on Feb. 1, 2018, with 10 months of FY18 behind it, the government had revised down its expected tax and non-tax receipts for FY18 only marginally, from the original budget of Rs 15.2 lakh crore down to Rs 15.1 lakh crore.
When the books were closed two months later, the provisional receipts for the full year FY18 were 70,000 crore or 0.4 percent of GDP lower than the revised estimates.
We might well be in for déjà vu later this year, and the scale of difference between the revised estimates and the final tax collections could be larger than last year.
What About The Fiscal Deficit?
While post-budget revisions in numbers can slip by with less scrutiny, any sharp revisions in the final fiscal deficit would raise eyebrows. However, the FY18 drop of 70,000 crore in revenue receipts was matched by an equal reduction in expenditure, leaving the fiscal deficit practically unchanged.
The biggest expenditure reduction in FY18 was in food subsidy, which dropped from a revised estimate of Rs 1.4 lakh crore on Feb. 1, 2018, to a final number of Rs 1.0 lakh crore by end March 2018. Alongside this, Food Corporation of India borrowed Rs 72,000 crore more than budgeted in FY18 from outside the government. It appears that the government may have simply reduced its payout of food subsidy to FCI, and instead encouraged it to borrow externally.
Since the government follows cash accounting, postponing or avoiding the payout of an expense keeps it off its books of accounts. The Finance Ministry may have achieved a 0.4 percent of GDP reduction in FY18 headline fiscal deficit through this route.
Back To The Future
The preparation for a repeat seems to have been put in place for the current fiscal ending-March 2019 as well. The revised estimates for FY19 have pegged food subsidies at Rs 1.7 lakh crore.
Alongside, the revised estimates show that FCI is now expected to raise Rs 1.96 lakh crore via other sources, up by a large Rs 1.24 lakh crore from the original budget estimate of Rs 72,000 crore. We could again see a reduction in the final food subsidy paid by the government to FCI, to help keep the final fiscal deficit around the revised estimate.
Once again, by avoiding payment of food subsidy to the FCI and instead encouraging them to borrow the funds in the market, the government could reduce headline fiscal deficit by about 0.7 percent of GDP for FY19.
The cumulative Rs 1.96 lakh crore of FCI borrowings at the end of FY19, or over 1 percent of GDP, could represent fiscal deficit suppressed over the last two fiscal years.
Now You See Me
There are other ways in which the government can manage the headline fiscal deficit. As mentioned earlier, we follow cash accounting, so delaying payments and refunds beyond the current fiscal is a simple way to lower expenditures, increase revenues, and reduce fiscal deficits. It is difficult to estimate the cumulative fiscal suppression, if any, on this count. This may also incentivise the government to delay legitimate payments – something stakeholders dealing with the government often complain of.
The government has also taken interim dividends from the Reserve Bank of India in FY18 as well as FY19. While at Rs 28,000 crore or 0.15 percent of GDP, the amount is not as material as the FCI borrowing, we are bringing forward future revenues to spend today.
There are issues in capital receipts as well, where successive governments have managed to show a net capital receipt to themselves from what are essentially left-pocket right-pocket transfers.
Implications For Policy
The bottom line is that the true central fiscal deficit may be much higher than the headline. Much of the increased fiscal deficit is ‘revenue deficit’, or money borrowed just to fund our current bills – salaries, pensions, interest costs, subsidies – rather than capital investments. After the amendment to the FRBM Act in 2018, we no longer have a target to bring down the revenue deficit over time.
The RBI and the Monetary Policy Committee have accepted the headline fiscal deficit numbers. In the Feb. 5 post-MPC press conference, RBI Governor Shaktikanta Das brushed aside the issue of public sector borrowing and said that was for “fiscal administrators to decide”.
We now have a situation where fiscal policy could be significantly more expansionary than we care to admit, while monetary policy is supportive as well.
Besides the repo rate cut on Feb. 5, the RBI has, so far, purchased 74 percent of the net central government market borrowing for FY19, to infuse rupee liquidity.
The Truth Shall Set Us Free
First, we need to recognise and address the elephant in the room – the trust deficit around our fiscal math.
Second, with credible data, we need a reasoned debate on the best way to conduct policy in the current context. Given very low inflation, manageable crude oil prices, soft global economic and monetary outlook, we may well decide that the current policy of fiscal and monetary accommodation is indeed the best way forward. But these have to be open-eyed decisions.
Past experiments with simultaneously accommodative fiscal and monetary policies have left India vulnerable to external imbalances, twin deficits, financial sector weaknesses, and financial instability.
If nothing else, a proper debate might throw up ways to mitigate these risks. Perhaps we will take steps to ensure more of the fiscal spending goes into productive capital spending. Perhaps we take steps to ensure that the fiscal spend does not result in an increase in consumption related imports. Perhaps we might ponder alternative ways to address the rupee liquidity shortfall in the system, without effectively having the RBI monetise the government deficit.
Finally, particularly with the competitive populism that has stricken our political debates, we need to protect the credibility of our fiscal math. We need better accounting standards, and the equivalent of the bipartisan U.S. Congressional Budget Office to review the impact of our budget proposals in a timely fashion.
Ananth Narayan is Associate Professor-Finance at SPJIMR. He was previously Standard Chartered Bank’s Regional Head of Financial Markets for ASEAN and South Asia.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.