The Medium-Term Fiscal Policy (MTFP) Statement presented with the Budget 2019-20, pegged the fiscal deficit target for 2019-20 at 3.3% of GDP, which was further expected to follow a gradual path of reduction and attain the targeted level of 3% of GDP in 2020-21, and continue at the same level in 2021-22. It was further projected that Central Government liabilities will come down to 48.0% of GDP in 2019-20.
The declining path of Central government debt was expected to continue with debt reaching 46.2% of GDP and 44.4% of GDP in 2020-21 and 2021-22, respectively. This declining debt trajectory was expected based on a stable inflation regime and a reduction in the fiscal deficit.
Central Government Finances
Trends in Receipts
- The Budget 2019-20 targeted a high growth in Non-debt receipts of the Central Government, which was driven by high expected growth in Net Tax revenue and Non-Tax revenue.
- The direct taxes, comprising mainly of corporate and personal income tax, constitute around 54% of GTR.
- Receipts from corporate and personal income tax have improved over the last few years.
- Better tax administration, widening of TDS carried over the years, anti-tax evasion measures and increase in effective taxpayers base have contributed to direct tax buoyancy.
- Widening of the tax base due to an increase in the number of indirect tax filers in the GST regime has also led to improved tax buoyancy.
- Several initiatives by GSTN have been taken to create an environment of voluntary compliance based on taxpayers behaviour parameters through deterrence, developing social and personal norms, reducing complexity, and enhancing fairness and trust to E-way bill
- Return filing status of a GSTIN visible in the public domain on the GST Portal
- SMSs for reminders of the due date of monthly return
- Free accounting & billing software provided to small taxpayers
- The compliance rating score of the taxpayers available in the public domain. Acknowledging the contribution of compliant taxpayers.
- comprises mainly of interest receipts on loans to States and Union Territories, dividends and profits from Public Sector Enterprises including a surplus of Reserve Bank of India (RBI) transferred to Government of India, receipts from services provided by the Central Government and external grants. The Budget 2019-20 aimed to raise INR 3.13 lakh crore of Non-Tax revenue, 1.5% of the GDP.
Non-debt Capital receipts:
- These mainly consist of recovery of loans and advances, and disinvestment receipts.
- Over the last few years, the contribution of Non-debt Capital receipts has improved in the total pool of Non-debt receipts. They have been pegged at Rs.1.20 lakhs core, 0.6% of GDP
- The receipts from the recovery of loans and advances have been declining over the years.
- The major component of Non-debt Capital receipts is disinvestment
- Receipts that accrue to the government on the sale of public sector enterprises owned by the government (including the sale of strategic assets). The government aimed at mobilising Rs. 1.05 lakhs core on account of disinvestment proceeds as per 2019-20 BE. Given the significant pipeline of deals that are in process, realizations are likely to accelerate.
Trends in Expenditure
- As India’s tax to GDP ratio is low, the Government faces the challenge of providing sufficient funds for investment and infrastructure expansion while staying within the bounds of fiscal prudence. Therefore, improving the composition and quality of expenditure becomes significant.
- The composition of government expenditure in the last few years reveals that expenditure on defence services, salaries, pensions, interest payments, and major subsidies account for more than sixty % of total expenditure.
- Budgetary expenditure on subsidies has seen significant moderation through improved targeting and considerable restructuring and reclassification of Central sector and Centrally Sponsored Schemes in recent years.
- Apart from budgetary spending, Extra Budgetary Resources (EBR) have also been mobilized to finance infrastructure investment since 2016-17.
Transfer to States
- Transfer of funds to States comprises essentially of three components: share of States in Central taxes devolved to the States, Finance Commission Grants, and Centrally Sponsored Schemes (CSS), and other transfers.
- Both in absolute terms and as a percentage of GDP, total transfers to States have risen between 2014- 15 and 2018-19 RE.
- The Budget 2019-20 envisages an increase in expected grants and loan to States relative to 2018-19 RE, on account of higher requirements under-compensation to States for revenue losses on the rollout of GST, grants to rural and urban bodies and releases under Samagra Shiksha.
The fiscal outcome in 2019-20 (up to November 2019) vis-à-vis 2019-20
- Indian economy registered a sluggish growth during the first half of 2019-20. the fiscal deficit of the
- Central Government at the end of November 2019 stood at 114.8% of the Budget Estimates.
- Revenue receipts have grown at a much higher pace during 2019-20 (April to November 2019) over the corresponding period last year.
- Considerable growth in Non-Tax revenue, especially dividends and profits, offset the low growth in Net Tax revenue, underlie it. Dividends and profits led by transfer from RBI grew at roughly three times in April-November 2019 over the same period last year.
- Within direct taxes, personal income tax has grown at 7% while the corporate tax has registered negative growth during the first eight months of the current financial year.
- The gross GST monthly collections have crossed the mark of one lakh crore, for a total of five times, during 2019-20.
- On the expenditure side, the capital expenditure from April to November 2019-20 has grown at roughly three times vis-à-vis the same period in 2018-19.
- Also, revenue expenditure has grown at a higher rate during these eight months of 2019-20, compared to the same period the previous year.
Central Government Debt:
- Total liabilities of the Central Government include debt contracted against the Consolidated Fund of India, technically defined as Public Debt, as well as liabilities in the Public Account.
- Total liabilities of the Central Government at end-March 2019 stood at Rs. 84.7 lakh crore and 90% of which was public debt.
- Central Government debt is characterised by low currency and interest rate risks. This is owing to the low share of external debt in the debt portfolio and almost the entire external borrowings being from official sources. Further, most of the public debt has been contracted at a fixed interest rate making India’s debt stock virtually insulated from the interest rate volatility. This lends certainty and stability to the budget in terms of interest payments.
- As per 2019-20 budget estimates of the State Governments, the States’ combined own Tax revenue and own Non-Tax revenue is anticipated to grow at 11.1% and 9.9% respectively, which is low relative to the robust growth displayed in 2018-19 RE.
- The rising trend in revenue expenditure is driven by the rise in committed expenditure including pension and interest.
- In fact, the RBI Study on State Finances attributes the fiscal consolidation of the States in the last four to five years to the steep decline in expenditure, mainly capital, which may have adverse implications for the pace and quality of economic development, given the large welfare effects of a much wider interface with the lives of people at the federal level.
- The States have thus continued on the path of fiscal consolidation and contained the fiscal deficit within the targets set out by the FRBM Act.
- For the year 2019-20, the States have budgeted for a gross fiscal deficit of 2.6% of GDP as against an estimate of 2.9% in 2018-19 RE
- On the other hand, the debt to GDP ratio for States has risen since 2014-15 owing to the issuance of UDAY bonds in 2015-16 and 2016-17, farm loan waivers, and the implementation of Pay Commission awards
- The Debt to GDP for States is likely to remain around 25% of GDP in 2019-20, clearly making the sustainability of debt the main medium-term fiscal challenge for States.
General Government (Centre plus states) Finances:
- Will continue on the path of fiscal consolidation.
- The fiscal deficit of the General Government is expected to decline from 6.2% of GDP in 2018-19 RE to 5.9 % of GDP in 2019-20 BE.
- However, the combined liabilities of Centre and States have increased to 69.8% of GDP as on and-March 2019 (RE) from 68.5% of GDP as on end-March 2016.
- The year 2020-21 is expected to pose challenges on the fiscal front. While on one hand, the outlook for global growth persists to be weak, with escalated trade tensions adding to the risk; on the other hand, the pace of recovery of growth will have implications for revenue collections.
- In order to boost the sluggish demand and consumer sentiments, counter-cyclical fiscal policy may have to be adopted to create additional fiscal headroom. During the first eight months of 2019-20, the indirect tax collections have been muted. Therefore, the revenue buoyancy of GST would be key to the resource position of both Central and State Governments. On the expenditure side, rationalisation of subsidies especially food subsidy could be an important tool for expanding the headroom for fiscal manoeuvre.
- The Fifteenth Finance Commission reportedly has also submitted its Interim Report and its recommendations, especially on tax devolution, would have implications for Central Government finances.
- Finally, the geopolitical situation unfolding in West Asia is likely to have implications for oil prices and thereby on the petroleum subsidy, apart from having implications for the current account balance.
Central Government Receipts
Non-Tax revenue comprises mainly of interest receipts on loans to States and Union Territories, dividends and profits from Public Sector Enterprises including a surplus of Reserve Bank of India (RBI) transferred to Government of India, receipts from services provided by the Central Government and external grants