Fiscal deficit: Weak tax collection may push Govt to cut spending

The Centre’s fiscal deficit zoomed to nearly 90 per cent of the Budget estimate in the first seven months (April-October) of this financial year, with tax revenue below target and no sign of disinvestment.

According to the latest data from the Controller General of Accounts (CGA), the fiscal deficit stood at ₹4.76 lakh crore, against the Budget target of ₹5.31 lakh crore. This is 89.6 per cent of the Budget estimate, compared with 84.4 per cent in 2013-14. Interestingly, the percentage of both earnings and expenditure (against Budget estimate) are down during this fiscal year against last year. The earnings data are more disappointing, which appears to have resulted in the widening of the deficit.

Rohini Malkani, an economist with Citi, said that while in the near term the Government will aim to meet its deficit target of 4.1 per cent through austerity measures and Plan expenditure cuts, fiscal consolidation over the longer term can only be achieved with structural fiscal reforms.

“All eyes are now on the Government’s February Budget for clarity/direction on implementation of GST (goods and services tax), targeted cash transfers and expenditure rationalisation,” she said.

In a note, Sonal Varma and Aman Mohunta of Nomura said the Finance Ministry has implemented a mandatory 10 per cent cut in discretionary spending and will also save on fuel subsidies in H2 (October-March) due to the fall in oil prices.

“However, today’s data indicate, in our view, that the above measures may not fully offset the shortfall in tax revenues and lack of disinvestment. Therefore, additional spending cuts may be necessary to meet the fiscal deficit target,” the note said.

But Aditi Nayar, senior economist with ICRA, is hopeful that the fiscal deficit will not breach the Budget estimate for 2014-15. “The sluggish capital spending so far in 2014-15 suggests that capital expenditure will fall short of the budgeted allocation.

“Capital spending would need to expand by a sharp 57 per cent in y-o-y (year-on-year) terms in the remainder of this fiscal year to achieve the Budget estimate, which appears unlikely.

Moreover, the cuts in non-Plan expenditure and savings related to fuel and food subsidies would dampen revenue expenditure growth in the remainder of FY15,” she said.

But, Nayar fears that the tax collection target may not be met. “The magnitude of funds that the Government raises through the disinvestment route and telecom auctions would affect its revenue buoyancy,” she said.

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