The Economic Survey made out a strong case for the Centre to create additional fiscal headroom to revive growth in the economy. As if on cue, the government’s fiscal deficit upto December shot up to 132 per cent of the budgeted full-year target for FY20 (up from 115 per cent until November). The run rate for the fiscal deficit for the nine months, has been the highest in the last five years, led by significant growth in both revenue and capital expenditure. Fiscal deficit for the April-December period has been 87-144 per cent of full year target, in the previous four years.
The fiscal deficit usually shoots up in the first nine months, and is contained (at least optically) by sharp cut back in expenditure in the fourth quarter. But this time around, a sharp deviation from the budgeted 3.3 per cent fiscal deficit target for FY20, is a given. Even if the Centre reins in expenditure hereon, fiscal deficit is likely to slip by 0.4-0.5 per cent, implying 3.8 per cent fiscal deficit for FY20.
The CSO’s first revised estimates for FY19 (that were also released on Friday), has pegged down the nominal GDP growth for the last fiscal to 10.9 per cent from 11.2 per cent earlier. If growth for FY20 is also revised downward (currently pegged at 7.7 per cent based on CSO’s latest FY19 estimates), then there could be some more pressure on the fiscal deficit.
Weak revenues
For the April-December period, gross tax revenues have actually shrunk by 3 per cent (after a meagre 0.8 per cent growth until November). Fall in corporate tax of 13.5 per cent, and lower collections from excise and customs has impacted tax revenues. Importantly, income tax has grown by a modest 5.1 per cent till date, as against an ambitious 23 per cent growth set out in the Budget last year.
On the non-tax front, while the surplus from the RBI has been a kicker, abysmal disinvestment proceeds have upset the apple cart. Against the budgeted Rs 1.05 lakh crore for FY20, only Rs 18,000 crore has been raised so far. While the Centre may be able to scale up proceeds, the shortfall will be huge. Given that the disinvestment proceeds were expected to take care of 15 per cent of the fiscal deficit for FY20, a sharp miss on this front, will cost the Centre dearly.
Upping expenditure
Despite the significant shortfall in revenues receipts (only 58 per cent until December), the Centre has not reined in its expenditure. Central government spending gained momentum (as per CGA figures) in September, and more significantly in October and November. In the month of December, the pace of spending went up sharply, leading to growth in nine months expenditure of 15 per cent (20 per cent growth Budgeted for full year). While this has aided growth, it has left no wiggle room for the Centre to contain fiscal deficit.
But what is more important to note is that growth in government expenditure has been not been broad based. Revenue expenditure growth has been led by transfer to States, interest payments, defence pension payouts and fertilizer subsidy. While capital expenditure was largely driven by capital outlay on defence services and railways.
Hence the Centre may not have much room for cutting back expenditure, particularly given the sharp slowdown in the economy. Fiscal deficit of 3.7-3.8 per cent of GDP in FY20, looks very much on the cards.
Bond yields to shoot up
In the previous Budget the Centre’ gross borrowings for FY20 were pegged at Rs 7.1 lakh crore. Gross borrowings upto Jan 24, is at Rs 6.82 lakh crore. The Centre’s fiscal deficit so far has been financed by Rs 6.45 lakh crore of total net market borrowings, 144 per cent of the budgeted Rs 4.48 lakh crore.
Sharp rise in borrowings than budgeted for, will go down well with the bond market. But with FY20 mostly done and dusted, the bigger worry for the market will be the fiscal deficit number for FY21.