To spend or not to spend: Sitharaman walks a tight fiscal rope this budget

How do you turn around a sharp slowdown in the economy? The obvious answer would be to splash money towards development projects that would create more jobs, boost consumption and revive demand across sectors. However, the private sector is in no position to spend as existing capacities remain underutilised. Balance sheets of several companies are also already stretched. That would mean the government must do much of the heavy lifting to turnaround the economy. But with tax collection already below targets, the government, too, may not have too much headroom to increase spending significantly. 

In the previous budget, the government had set a fiscal deficit target of 3.3 per cent of GDP. However, given the revenue shortfall, it is highly likely that it will miss this target. In the first eight months of the financial year, the fiscal deficit touched 114.8 per cent of the target. The gap between the government’s expenses and revenue stood at a little over Rs 8 lakh crore. 

As the economy has slowed, so has consumption, in turn driving tax collections lower. Between April-November, the government had collected Rs 7.5 lakh crore in tax receipts, only 45 per cent of its full year target. The Goods and Service Tax (GST), too, has lagged estimates, with GST collections failing to touch Rs 1 lakh crore in four of the first nine months of 2019-2020. 

The government announced several measures over the past few months to lift the economy. One of the boldest move was to cut corporate tax for existing companies to 22 per cent from 30 per cent, and for new manufacturing companies that are incorporated after October 1, 2019 to 15 per cent from 25 per cent. 

The move is expected to boost corporate profits and, in turn, drive private sector investment over a period. However, in the interim, the government will have to take a Rs 1.45 lakh crore revenue hit on revenue. “The reduction in tax rate and lower economic growth impacted government’s tax revenue. Lower revenue generation restricts room for huge stimulus, whereas the economy can do with a booster shot,” said M. Govinda Rao, chief economic advisor, Brickwork Ratings.

Analysts expect the actual tax collection this year will fall short of budget estimates by around Rs 2-2.5 lakh crore. 

There is an expectation that in line with corporate tax cuts, the finance minister may announce income tax cuts for individuals. However, there may not be much scope for that, given the revenue pressure. “The wiggle room for the government to engage in fiscal stimulus through increased spending or further tax cuts (after the already implemented corporate tax cuts in late September) seems limited on account of the already stretched fiscal position,” said Manishi Raychaudhuri, head of equity research for Asia Pacific at BNP Paribas.

Beyond tax collections, disinvestment of public sector companies has also been an avenue for revenue generation for the government. This year, it had targeted raising Rs 1.05 lakh crore through divestments. However, as of November 2019, the government had managed to raise only Rs 18,000 crore via this route, according to analysts. 

The government has announced plans to sell strategic stake in state-owned companies like Bharat Petroleum Corp (BPCL), Container Corporation of India (Concor) and Shipping Corp of India. It has also re-started the process of selling Air India. However, many of these divestments may yet get defered into the next financial year, given the time consuming process.

“Based on the current pace of disinvestments, there is a likelihood of shortage in receipts of Rs 46,900 crore. In FY21, we are expecting Rs 1.05 lakh crore, based largely on privatisation of BPCL and Concor,” said Sunil Tirumalai, head of research at Emkay Global Financial Services.

With lower tax collections and some disinvestments likely to be pushed to next financial year, non-tax revenue will then become key. The government has already received Rs 1.76 lakh crore as dividend payment from the Reserve Bank of India (RBI). The government may seek another interim dividend payment to bridge the revenue shortfall from the central bank.

It is also expected to receive around Rs 1 lakh crore in adjusted gross revenue (AGR) dues from telecom companies after the Supreme Court ruled in favour of how the government defines AGR. However, the already stressed telecom companies may not be in a position to repay it in full, unless there is some government relief. Furthermore, the government offered two-year moratorium on spectrum-related dues worth Rs 42,000 crore, which could offset some of the gains expected from the AGR payments. 

Despite the RBI surplus transfer, in the absence of AGR, the government is likely to miss its fiscal deficit target by a margin, and it could come in close to 3.8 per cent versus its targeted 3.3 per cent of GDP. 

In this backdrop, the government may look at cutting some expenditure and pushing some to the next year. “The expenditure growth was budged at 20.5 per cent year-on-year compared with actual growth of 8.0 per cent in FY19. We believe that due to lower realisations, the government is likely to cap the expenditure to a growth of 12.6 per cent year-on-year in FY20, that is savings of Rs 1.8 lakh crore,” said Tirumalai. 

The government could hike petrol and diesel duties by Rs 4 each, which will likely result in additional revenues of Rs 30,000 crore, said Tirumalai. The government is also likely to open up over 200 commercial coal blocks in the next five years, which could also increase the royalty commission for the government over a period, he added.

With the private sector unlikely to pickup investments in a big way, unless the government increases spending, the economic slowdown could drag on for longer, warn analysts. “The way to meet fiscal deficit is to cut down in expenditure. If that is the route that the government is taking, then obviously, you can meet the fiscal requirements, but it could prolong the slowdown,” said Abhiram Eleswarapu, head of India equity research at BNP Paribas.

This budget is clearly going to be a tight rope walk for the government.