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Behind the decline in fiscal deficit (Relevant for GS Prelims & Mains Paper III; Economics)

FM surprised all by announcing a marginal decline from 3.4% to 3.3%. How will it be achieved? Will it affect the flow of funds between Centre and states? Will it come at the cost of capital expenditure by PSUs?

But despite sluggish tax collections, Sitharaman has chosen to stick to the gilded path, projecting to bring down the deficit to 3.3 per cent of GDP in 2019-20 (BE), from 3.4 per cent in 2018-19 (RE).

How does the Centre plan to meet its fiscal deficit target?
At the aggregate level, the Centre expects its gross tax revenues to grow at 18.3 per cent in FY20. Achieving this is a tall task. Tax collections grew by a mere 8.4 per cent in FY19. Sluggish economic activity — the RBI has lowered its GDP growth projection for FY20 to 7 per cent from 7.4 per cent earlier.

Within the broad rubric of gross tax collections, direct tax collections are expected to grow at roughly 18.6 per cent in FY20, up from 12.3 per cent the year before.

On the other hand, indirect tax collections have been budgeted to grow around 18 per cent in FY20, up from roughly 4 per cent the previous year.

Sources other than tax
The finance minister has also relied heavily on dividends from the RBI and other public financial institutions, disinvestment proceeds as well as revenues from the telecom sector to shore up revenues. But the worry is that failure to meet these stiff targets will not only risk the task of meeting the fiscal deficit target for this year, but also cast doubts on the medium term fiscal roadmap that envisages bringing down the deficit to 3 per cent in 2020-21.

What is the importance of cesses and surcharges?
Over the years, the Centre has begun to rely more on revenue collected through cesses and surcharges to meet its expenditure obligations. Unlike other taxes, revenue collected through this route is not part of the divisible tax pool, and is thus not shared with the states. According to the 14th Finance Commission, states should receive 42 per cent of the divisible tax pool. But since cesses and surcharges are not part of this pool, an increase in revenues through this channel helps shore up only the Centre’s coffers.

government revenues

capital expenditure

In this Budget too, the finance minister has raised the special additional excise duty and road and infrastructure cess each by one rupee on a litre of petrol and diesel. As a result of this, the states’ share in gross tax revenues (excluding GST compensation cess as that is meant to compensate states) is expected to fall from 36.3 per cent in FY18 to 34.4 per cent in FY20.

To put this in perspective, the amount the Centre hopes to mop up through ceases and surcharges is now greater than its entire allocation to centrally sponsored schemes or even its total capital expenditure.

Will public sector borrowing continue to crowd out private investment?
In the recent past, there has been much concern over the rise in borrowings of the public sector (Centre, states and public sector enterprises) as this left very little space for the private sector to borrow. But, the Budget documents reveal that borrowings by central PSUs are expected to decline from Rs 4.1 lakh crore in FY19 to 3.1 lakh crore in FY20. Much of this decline is due to fall in FCI’s borrowings.

On the other hand, the Centre’s gross market borrowings are pegged at Rs 7.1 lakh crore in FY20, up from Rs 5.71 lakh crore last year. But, as announced in the Budget, part of the borrowings will be met by raising funds from abroad. This will bring down the level of public sector borrowings in the domestic market, creating space for the private sector.

Even though the combined borrowings of the Centre and PSUs have risen as a percentage of GDP, they are expected to decline to 4.9 per cent of GDP in FY20 from 5.2 per cent in FY19 (GDP estimates have been taken from the Budget).

Will lower borrowings impact capital spending by the public sector?
The Budget has pegged the Centre’s capital expenditure at Rs 3.3 lakh crore in FY20, up from Rs 3.16 lakh crore in FY19. Add to this capital expenditure of railways and other public sector enterprises and the total capital expenditure works out to around Rs 8.76 lakh crore in FY20, lower than Rs 9.29 lakh crore in the previous year.

(Source:https://indianexpress.com/article/explained/fiscal-deficit-union-budget-2019-highlights-nirmala-sitharaman-indian-economy-gdp-growth-5819920/)



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