India faces sharp fiscal deficit slippage

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India faces sharp fiscal deficit slippage

Monday, 04 July 2022 | Uttam Gupta

India faces sharp fiscal deficit slippage

International crude and fertiliser prices disturbed Government’s budget calculations; welfare expenses are adding to fiscal stress

The Modi government has taken a number of measures, including tax cuts and increase in subsidy, to give protection to consumers from the steep rise in international prices of fuel, fertilisers, and food. But it could come at a huge cost in terms of impairing the Centre’s ability to achieve the fiscal deficit (FD) target of 6.4 per cent of the gross domestic product (GDP) set for the current financial year (FY).
Before analysing the numbers for the current FY, let us see how things panned out during 2021-22 when India was confronted with rising international prices of the aforementioned commodities.     
During 2021-22, thanks to a steep increase in prices of fertilizers and raw materials (RMs) such as phosphoric acid and ammonia used in their production (the price of di-ammonium or DAP more than doubled while the price of urea and muriate of potash or MOP went up almost three times each), the actual outgo on fertilizer subsidy – being the excess of cost of supply over the price paid by farmers - was `162,000 crore against the budget estimate (BE) Rs 80,000 crore.
Likewise, payment on food subsidy, being the excess of the minimum support price (MSP) plus handling and distribution cost over the issue price of food to the beneficiaries under the National Food Security Act (NFSA) and other welfare schemes, was `286,000 crore against BE of `243,000 crore. This slippage was primarily due to the fifth extension of the Pradhan Mantri Garib Kalyan Anna Yojana or PMGKAY (October 2021 – March 2022). It was started in March 2020, to mitigate the consequences of pandemic, by giving five kg of rice or wheat per person per month to each of the 800 million persons for “free”.
The excess of expenses on fertilizer and food subsidy over their respective BE adds up to `125,000 crore.
A third major area of slippage during the year was proceeds from disinvestment of Government’s shareholding in public sector undertakings (PSUs). The actual proceeds were only `13,500 crore against BE of `175,000 crore, resulting in a shortfall of `161,500 crore. Put together, the total slippage in expenses and receipts when
compared to the BE was `286,500 crore.
On the other hand, the gross tax revenue of the Union government was about `27,10,000 crore against the BE of `22,17,000 crore. After mandatory transfers to the states (as per the Finance Commission, 41 percent of tax receipts of the Centre - excluding cess collections which are not part of the divisible pool - are shared with the States), the amount remaining with the Centre was `18,50,000 crore against the corresponding BE of `15,50,000 crore.
It is this excess tax receipts of `300,000 crore (`18,50,000-`15,50,000) that has helped the Centre in making up for the slippage in expenditure and other areas of revenue. It was able to restrict FD to 6.7 percent against a target of 6.8 percent.  
For 2022-23, Finance Minister Nirmala Sitharaman in the hope that prices would decline allocated `105,000 crore for fertilizer subsidy (against RE `162,000 crore for 2021-22). But thanks to the Ukraine crisis, the international price of fertilizers continues to stay heated. To protect farmers from these hikes, she has already taken approval for an additional `110,000 crore.   
As for food subsidy, Sitharaman allocated `207,000 crore for the current FY – down from `286,000 crore for 2021-22 (RE). Now, in view of the extension of PMGKAY by six months till September 30, 2022, the Centre will have to spend `80,000 crore more under this head. Put together, the additional expenses on fertilizers and food subsidy over BE will be `190,000 crore.
On the other hand, the Centre was expected to garner gross tax revenue (GTR) of around `30,50,000 crore against the BE of R `27,40,000 crore. The cushion of about `300,000 crore in GTR – after mandatory transfer to the States - should leave an extra about `180,000 crore with the Centre to make up for the slippages in expenses on fertilizers and food.
Modi is contemplating to extend the PMGKAY for another six months till March 2023 despite the caution sounded by the officials of the finance ministry due to State elections. This will increase food subsidy further by `80,000 crore.
Besides, given the continuing high prices due to prolonged Ukraine war, fertilizer subsidy is unlikely to settle at anything less than `250,000 crore. This means another `35,000 crore over and above `215,000 crore already provided for. Put together, these two heads will consume additional `115,000 crore. Adding an extra `6000 crore due to reintroduction of subsidies on cooking gas, we get a total excess of `121,000 crore over BE. 
At another level, on May 21, 2022, the government announced reduction in the central excise duty (CED) on petrol and diesel by `8 per litre and `6 per litre, respectively, besides slashing import duty on edible oils and other items of mass consumption. Put together, these cuts will cause revenue loss of `120,000 crore (`100,000 crore loss due to cuts in duty on fuels alone).
On account of the excess subsidy payments (`121,000 crore), the Centre will be staring at a slippage of `240,000 crore or close to 1 percent of GDP.
Against a target of 6.4 percent of GDP for the fiscal deficit, it could end with 7.4 percent in the current fiscal.
While fixing the FD target for 2022-23 at 6.4 percent of GDP in her budget speech, Sitharaman had described this as ‘advancing on the road to fiscal consolidation’, citing the target of 4.5 percent to be achieved by 2025-26. This was amusing.
A committee on Fiscal Responsibility and Budget Management (FRBM) Act under Dr NK Singh set up by the Modi government (2016) had asked it to aim at an FD of 2.5 percent during 2022-23. In the budget for 2021-22, it brushed aside this recommendation; instead, the FM dished out a revised trajectory of FD aiming at 4.5 percent and that too in 2025-26.
With the current FY likely to end with FD of 7.4 percent - against the target of 6.4 percent - the government won’t be able to stick to even this substantially relaxed fiscal trajectory.
This is dangerous as it will lead to an increase in Centre’s debt to unsustainable levels. Already, it has climbed to 62 percent of GDP against 46 percent set by Singh committee (for the Centre and State put together, this has hit 90 percent). The Government should make efforts to avoid this horrendous scenario.   
Even as Modi dispensation is doing its best to increase tax collection (but for this the fiscal situation could have been much worse) and the momentum should be maintained, there is an urgent need to rein in 
Expenses, particularly on ‘welfare schemes’. Here, substantial savings are possible by restricting coverage, cutting costs, improving efficiency and minimizing leakages.

The author is a policy analyst (www.uttamgupta.com)

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