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Following is an article published by our working group coordinator in an independent online news platform based in India- The Wire.
The article explains the rise in India's revenue deficits over subsequent budgets.
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*Explaining the Rise in Revenue Deficit Between Modi Govt’s Interim and Full Budgets *
By Aneesha Chitgupi
A comparison between the Interim Budget (IB) presented on February 1, 2019, and the full Union Budget (FB) presented before parliament on July for the current fiscal year (2019-20) throws up some intriguing questions.
While most commentators have hailed the lack of fiscal profligacy and constraint displayed in reining the fiscal deficit to 3.3% of GDP projected in the FB as against 3.4% in the IB, the increase in the revenue deficit to GDP has gone mostly unnoticed.
Under the new framework of the Fiscal Responsibility and Budget Management (FRBM) Act, ‘Revenue Deficit’ and ‘Effective Revenue Deficit’ have been removed as targeted fiscal indicators of measuring fiscal health of the economy, thus, unlikely to attract much attention.
The revenue account is made up of revenue receipts and expenditure – when the latter is greater than the former, it leads to what is called a revenue deficit. Revenue receipts include tax revenue (which consists of direct and indirect taxes.) and non-tax revenue (such as interest, dividends, profits, external grants etc.).
While the impact of revenue deficit on the fiscal deficit of the Union government can be reduced by increasing capital receipts excluding borrowings, one wonders why a shift in revenue estimates changed over four months.
A closer look at the revenue account – while drawing comparisons between the two budgets released this year – throws up a significant shift in tax revenues. The gross tax revenue estimated in FB (Rs 24.6 lakh crore) reduced by Rs 0.91 lakh crore as compared to IB (Rs 25.5 lakh crore). Among its components, corporate tax is the sole item that shows an increased collection in the FB when compared to IB (of Rs 0.06 lakh crore), whereas all the other items such as income tax, GST, states’ share in tax revenue show a reduction in FB.
The present finance minister has reduced the estimates of tax revenue which could be a cause to worry as the tax on income and GST are lower than IB. This is slightly puzzling because income tax slabs remain the same and the GST rates have not undergone major changes.
While tax revenues have shown a dip in FB, the non-tax revenue estimates depict a different story. Non-tax revenue estimates have increased from Rs 2.73 lakh crore presented in IB to Rs 3.13 lakh crore in FB. This is largely due to higher estimates of dividends and profits, and other non-tax revenue.
The main contributors to dividends and profits are dividends from public sector enterprises and other investments, and dividend/surplus of Reserve Bank of India, nationalised banks and financial institutions, but the full budget presented by Nirmala Sitharaman fails to address how a sudden increase can be expected on these items.
Yet, the estimated increase in non-tax revenue in FB fails to off-set the revenue deficit which increased from 2.2% of GDP estimated in IB to 2.3% in FB. Also, the revenue deficit increased its share in fiscal deficit from 64.7% to 69.7% from IB to FB. This is on account of reduced tax revenue in FB unmatched by a reduction in revenue expenditure as revenue expenditure stays similar in both the budgets.
While the revenue deficit is estimated to increase in FB in comparison to IB, the fiscal deficit shows a decline thanks to the increase in capital receipts, especially through disinvestment. Disinvestment receipts estimated in IB stood at Rs 0.9 lakh crore, which increased to Rs 1.05 lakh crore in FB owing to proposed strategic disinvestment in Air India and other PSUs.
With respect to the fiscal deficit, a comparison between the two budgets shows that the fiscal deficit in absolute terms is not significantly different, as the FB shows a marginal decline of Rs 239 crore only. The fine print lies in the estimated value of GDP. The FB estimates nominal GDP to grow at 12%, whereas it was 11.5% in IB. Considering the same level of growth as expected in IB, the fiscal deficit would continue to be 3.4% rather than 3.3%.
An upward revision in GDP growth rate is based on the premise that larger grants in aid for capital creation – which increased by 3.3% in FB – and recapitalisation of public sector banks through an infusion of Rs 0.7 lakh crore will boost economic activity. These computations are further based on stable crude oil prices and benign inflation. Given the strong stance of the US on Iran sanction and shortfall in monsoons, inflation may not remain comfortable after all.
A downward revision of the GST receipts from IB to FB indicates that government expects lesser GST revenue, implying that the problems associated with using the GST network are still persisting, hampering collections. Also, the targets set for receipts from disinvestment seem exaggerated. The reduction in revenue receipts and overestimation of capital receipts may lead to a larger deficit in fiscal indicators.
The efforts of the FM by bringing firms with below Rs 400 crore turnover under the 25% tax-bracket is well appreciated as this leaves larger corporate income for reinvestment acting catalyst for private activity.
On the other hand, the government should focus on making GST filing a simple and easy procedure to increase revenue collections, fast-tracking the disinvestment process and ensuring that the public investments lead to 12% growth rate as envisaged in the FB for the achievement of fiscal targets.
Link to the article: https://thewire.in/economy/explaining-the-rise-in-revenue-deficit-between-modi-govts-interim-and-full-budgets