Meeting FY22 fiscal deficit target hinges on divestment

After the government sought Parliament’s nod for a second batch of supplementary demand for grants that will cause a hit of Rs 2.99 trillion to the exchequer, doubts suddenly arose about the government’s ability to meet the Budget projections of reining in its fiscal deficit at 6.8 per cent of gross domestic product (GDP), or Rs 15.06 trillion, for the current financial year.

Till now, many were of the opinion that the government would succeed in checking the deficit at a much lower figure than what was given in the Budget Estimates (BE).

The government had sought Parliament’s approval to spend Rs 3.74 trillion extra, but Rs 74,517.01 crore will be matched by equal savings on other heads.

In the first batch, the government had got Parliament’s nod for an additional expenditure of Rs 1.87 trillion, which included a net cash outgo of Rs 23,674.81 crore.

As such, the government will spend around Rs 3.23 trillion more than the Budget Estimates during FY22.

This has prompted experts to say that the government is likely to breach the target of reining in its fiscal deficit at the level of the Budget Estimates despite fiscal prudence in the first seven months.

To fund Rs 3.23 trillion, the government is likely to get anywhere between Rs 1.4 trillion and Rs 1.75 trillion extra from taxes after devolution to the states and RBI’s dividend transfer over the Budget Estimates, according to the calculation by economists.

If that happens, the issue that arises is, where will the remaining Rs 1.48 trillion to Rs 1.83 trillion come from?

If these come from some revenue sources, fiscal deficit projections would be met.

If not, the extent of deviation from the fiscal deficit target would be determined by the quantum of shortfall.

CARE Ratings chief economist Madan Sabnavis said the Centre was not going to meet its fiscal deficit projections given in the Budget.

“There’s going to be a slippage of 0.5-0.7 percentage points, which means fiscal deficit would be 7.3-7.5 per cent of GDP,” Sabnavis said.

He calculated this slippage on the second batch of supplementary and did not take into consideration the first batch.

His calculation was based on the assumption that the divestment target of Rs 1.75 trillion would be met and whatever buoyancy was seen on the tax front in the first eight months of the current financial year would continue in the remaining four months as well.

He said Rs 1.25 trillion to Rs 1.6 trillion would be received due to higher buoyancy of tax revenues, which meant slippage from fiscal deficit projections would be close to Rs 1.4 to Rs 1.75 trillion.

If divestment slipped, the slippage would increase to that extent, Sabnavis said.

Others did not agree with this calculation because the finance ministry invariably has a game plan that it uses at the time of the revised estimates.

And this plan is further savings by the departments and ministries which did not use allocations made to it in earlier months.

Finance ministry sources agreed that it looked difficult to rein in fiscal deficit at 6.8 per cent of GDP in the current financial year.

However, they clarified that there could be some savings elsewhere.

“Hence simple addition of Rs 3.23 trillion (as net cash outgo from two supplementaries) is not correct,” one of the sources emphasised.

Icra chief economist Aditi Nayar also agreed that there would be some more savings in expenditures of some departments and ministries than what had been disclosed in the two batches of supplementaries.

She said if the divestment target of Rs 1.75 trillion for the current financial year was met, there would not be any slippage in the fiscal deficit target.

Of the Rs 1.75 trillion projected to come from divestment, only Rs 9,330 crore has been realised so far through minority stake sales in PSUs and the sale of Specified Undertaking of the Unit Trust of India’s stake in Axis Bank.

Finance secretary T V Somanathan had told Business Standard last month that the disinvestment target was unlikely to be met for the current financial year.

However, DIPAM secretary Tuhin Kanta Pandey is firm that the divestment target would be met.

To meet the target, the initial public offering of Life Insurance Corporation (LIC) and privatisation of BPCL are necessary.

The LIC IPO is expected to fetch the government Rs 1 trillion, though valuation of the biggest life insurer in the country is yet to be done.

The Centre is planning to offload about 10 per cent stake in LIC. To get Rs 1 trillion, LIC must be valued at Rs 10 trillion.

The government can get around Rs 45,000 crore more from BPCL by selling its entire 52.98 per cent stake in BPCL.

However, the government does not have much time in its hands, as only three-and-a-half months are left for the financial year to end.

Nayar’s view is that the divestment proceedings in all probability will fall short of the target of Rs 1.75 trillion and, if that happens, there would be slippage in fiscal deficit.

She said: “The Union government’s fiscal deficit will likely exceed Budget Estimates of Rs 15.1 trillion or 6.8 per cent of GDP during the current financial year.

“This is despite our estimates that tax revenues, after devolution to states, and the RBI surplus transfer will together surpass the BE by Rs 1.7 trillion.”

This means that Nayar expects that Rs 1.53 trillion (Rs 3.23 trillion minus Rs 1.7 trillion) would be met through savings of the departments and ministries.

This means that Nayar expects that Rs 1.53 trillion (Rs 3.23 trillion minus Rs 1.7 trillion) would be met through savings of the departments and ministries.

India Ratings chief economist Devendra Pant also said fiscal arithmetic of FY22 Budget would depend largely on divestment proceeds.

“If the government is able to do a few big ticket disinvestments, which will be challenging, they will be able to achieve the FY22 fiscal deficit target despite higher expenditure as proposed in the second supplementary demand for grants,” he said.

According to a written reply by minister of state for inance Pankaj Chaudhary in the Rajya Sabha, the centre’s net direct tax collections till December 7 of the current financial yar stood at Rs 7.39 trillion.

The collections 66.70 per cent of Rs 11.08 trillion pegged for direct taxes in the Budget for the current financial year.

The government has settled Rs 1.98 trillion as CGST in the first eight months of the current financial year which is 37.36 per cent of the Budget target of Rs 5.3 trillion.

Other figures are available till the first seven months of the current financial year.

The Centre’s fiscal deficit for the April-October period came in at Rs 5.47 trillion or 36.3 per cent of the Budget estimates.

In the corresponding period last year, the deficit was a high 119.7 per cent.

However, this should also be noted that the deficit touched 9.5 per cent of GDP last year against BE of 3.5 per cent though much of it was also accounted for by the payment of past dues of the Food Corporation of India.

In the pre-pandemic period (April-October 2019-20), the fiscal deficit was 102.4 per cent of the budget numbers.

Again it must be noted that the deficit widened to 4.6 per cent of GDP during 2019-20 against BE of 3.3 per cent.

Data released by the Controller General Accounts for the April-October period showed that the reduced fiscal deficit had come on the back of a phenomenal rise in revenue receipts and a fall in both capital and revenue expenditures.

While revenue expenditure as a proportion of the budget estimates is lower by 5.7 percentage points than the pre-pandemic level, capital expenditure is down 13.8 percentage points.

In 2019-20, the government had spent 59.5 per cent of its budgeted capital expenditure by October; this year, it has only spent less than half allocated to capital expenditure (45.7 per cent).

On the revenue side, the government had collected Rs 12.8 trillion, of which Rs 12.6 trillion accrued from revenue receipts and the rest was part of the non-debt capital receipts which includes divestment.

Of the Rs 12.6 trillion, Rs 10.5 trillion was from tax revenues after devolution to the states.

Tax collections till October have reached 68.1 per cent of the Budget estimates, almost double compared to last year’s Budget levels.

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