Former Economic Affairs Secretary Subhash Garg Flags Understatement Of ‘Real’ Fiscal Deficit

Ahead of the upcoming Union Budget presentation, former economic affairs secretary Subhash Chandra Garg has pointed to the understatement of fiscal deficit, using means such as funding via the National Small Savings Fund and borrowings through ‘fully serviced' bonds.

Garg, who resigned after being abruptly shifted from the Finance Ministry, estimates that the headline fiscal deficit for 2019-20 will likely be between 3.7-4 percent. The ‘real' fiscal deficit would be higher at close to 4.5-5 percent of GDP, Garg estimates.

He published his analysis of the government's accounts for the last three years in a blog dated January 14.

2019-20

According to Garg, the current financial year will see a significant revenue shortfall of up to Rs 2 lakh crore, which the government will find difficult to bridge despite planned expenditure cuts.

He explains as follows:

Revenue

• Government had pegged tax revenue growth at 25.26 percent. In actual, tax performance has been quite poor because of weak nominal growth, slow growth in personal income taxes and the government's decision to reduce corporate tax rates. GST revenues are also not very robust. There is substantial shortfall visible in excise duties and customs duties, which had a very high asking rate this year.
• There is every likelihood that there would be a tax revenue shortfall of Rs 2 lakh crore, plus/minus Rs 25,000 crore this fiscal.
• A hefty transfer by the RBI, dividend from public sector companies, a part of licence fee and spectrum charges will help non-tax revenues.
• However, with only 20 percent of the divestment target met, non-tax revenue gains from other sources would be eroded.
• Overall, revenue shortfall of Rs 2-2.5 lakh crore can be expected.

Expenditure

• On the expenditure front, limiting expenditure to 25 percent of the budgeted amount in the last quarter will have little impact.
• Considering the nature of government expenditure (50 percent is establishment and interest payments) and a 65.3 percent of expenditure has already been incurred until November 2019, there is virtually no likelihood that the Government would be able to save anything from the budgeted expenditure of 2019-20, Garg said.

Fiscal Deficit

• According to Garg, headline fiscal deficit is likely to go up by Rs. 1.3 - 2 lakh crore. As a percentage of GDP, this will take fiscal deficit to between 3.7- 4 percent of GDP.
• However, to this headline fiscal deficit, Garg believes that three expenditure items — recapitalisation of banks and financial institutions, fully-services bonds and payment of food subsidies via NSSF must be added.

• These items will add Rs 1.75-2 lakh crore and push up the ‘real' fiscal deficit to 4.5-5 percent of GDP.

2018-19

Garg also provides his assessment of government accounts for 2018-19, which left many economists questioning the transparency of fiscal management.

• According to the Controller General of Accounts, the headline fiscal deficit was 3.4 percent of the GDP.
• However, once again, Garg believes that certain items need to be added back to the get the real fiscal deficit.
• Rs 1.06 lakh crore in equity investments were made into public sector banks and EXIM Bank in 2018-19.
• Rs 64,192 crore in revenue and capital expenditure was undertaken by issuing fully service bonds.
• Rs 70,000 crore in food subsidy expenditure was met via cash loans from the NSSF.
• If all these items are included in the fiscal deficit, it works out to Rs 8.86 lakh crore of 4.66 percent of GDP.

2017-18

For the year 2017-18, where actual data of fiscal transactions are available, the headline deficit was Rs 5.9 lakh crore. This is 3.5 percent of the nominal GDP.

According to Garg, the following items must be added:

• Rs. 80,000 crore of investment made in the equity of public sector banks.
• Rs. 65,000 crore of food subsidies as a loan from NSSF.
• Fully serviced bonds worth Rs 15,095 crore.
• When added back, the actual fiscal deficit for the year 2017-18 works out to 4.39 percent of GDP.