Fiscal deficit target breached in 8 months

Deficit reaches 112% of Budget Estimate; worst since global financial crisis

The government has breached its fiscal deficit target given in the Budget for 2017-18 in November itself. During the April-November period, the fiscal deficit was 112 per cent of its ~5.5 lakh crore target for current fiscal year. This is the highest deviation from the Budget Estimates (BE) for fiscal deficit in the first eight months of a financial year since 2008-09, the year of the global financial crisis.

This means that the government needs to have a fiscal surplus in the next four months combined if it has to meet its target, which observers said, is a difficult ask. The government’s decision to go in for ~50,000 crore additional borrowing this year will add to the problem, they said. During the April-November period, the revenue deficit also stood at 152 per cent of the ~3.2 lakh crore fullyear target, compared with 98 per cent during the same period last year. This means that the quality of the fiscal deficit is also very poor since much of the money is not going into asset creation.

In 2008-09, the fiscal deficit in April-November was 132.4 per cent of the full year’s target. That year, the deficit was targeted to be 2.5 per cent of gross domestic product (GDP), but crossed six per cent. The situation this year is not likely to turn out to be that grim.

Since then, the deficit had not crossed 100 per cent during the eight-month period until this year..

Official data released on Friday showed that the fiscal deficit, the difference between government expenditure and revenue, for AprilNovember 2017 was ~6.12 lakh crore, against a BE of ~5.46 lakh crore.

This was mainly due to lower goods and service tax collections, non-tax revenues such as spectrum and transfer of money by the RBI to the government and higher expenditure. Over the same period last year, the fiscal deficit was nearly 86 per cent of the BE.

“The disappointing GST collections for November 2017 and the recent increase in the Centre’s issuance calendar signal a fiscal slippage in 2017-18,” said Aditi Nayar, principal economist with ICRA.

Earlier this week, the Centre announced that it would borrow ~50,000 crore from the market over and above the BE of ~5.80 lakh crore for 2017-18, indicating a fiscal slippage this year. At the same time, the Centre reduced its borrowings through shortterm treasury bills by ~61,203 crore. This has made the task of calculating the fiscal deficit difficult.

The additional market borrowing could take the fiscal deficit to 3.54 per cent of the GDP this year, the same as in 2016-17, against the target of reining it in at 3.2 per cent. If short-term treasury bills are extended beyond a year, it could further widen the deficit.

GST collections in November fell to just above ~80,000 crore, lower than ~83,346 crore in October and far below the target ~91,000 crore a month.

Nayar said the magnitude of the fiscal slippage in 2017-18 would be governed by factors such as whether GST collections improved in JanuaryMarch. She said for the deficit target to be met, capital outlay and net lending would have to contract by 15.4 per cent in the last four months of this fiscal year, which would have negative implications for investment as well as overall economic activity.

“Moreover, revenue expenditure will have to stagnate in DecemberMarch to avoid exceeding the BE. The pace of growth of direct tax collections would need to improve to 21 per cent in the remaining four months of this fiscal year from 14 per cent in April-November, which appears unlikely,” she said.

Friday’s data showed that the government's revenue receipts were ~8.04 lakh crore in the eight months to November, or 53.1 per cent of the BE of ~15.15 lakh crore. Total expenditure was ~14.78 lakh crore at the end of November, or 68.9 per cent of the BE. It was 65 per cent of the BE a year ago.

Combined tax revenues reached their peak this year in September at ~2.50 lakh crore. The monthly tax mop-up is declining since, with ~1.40 lakh crore in October and ~1.14 lakh crore in November.

Capital expenditure during AprilNovember was 59.5 per cent of the BE compared to 57.7 per cent in the same period of the previous fiscal year. Capital spending increased in November to ~21,320 crore from ~16,406 crore in October. It was ~36,741 crore in September, the highest in this fiscal year.

Revenue expenditure, including interest payments, was 70.5 per cent of the BE during April-November. This compares with 66.1 per cent a year earlier.

The Centre is staring at a tax revenue shortfall of ~40,000-50,000 crore. A ~25,000-30,000 crore shortfall is expected in indirect tax revenue due to the GST, while receipts from non-tax revenues, including spectrum fees, transfer by the RBI and dividends from public sector enterprises and state-owned banks, and direct taxes could lead to a gap of ~20,000 crore between actual receipts and what was projected, even if expected higher proceeds from disinvestment are taken into account.