Given the slowdown in the economy and the chances of a fairly big shortfall in revenues, the government should have avoided the cut in excise duties for petrol and diesel. To give up Rs 13,000 crore at a time when it needs to step up expenditure dramatically, without pressuring the fisc too much, is somewhat foolhardy. Along with RBI’s lower dividend of Rs 28,000 crore, that’s already a shortfall of Rs 41,000 crore or 0.24% of GDP. To begin with, the FY18 expenditure target of Rs 21.47 lakh crore was higher by just 7% over FY17. This appears all the more inadequate today since the economy is steadily losing momentum—GDP in Q1FY18 grew just 5.7% and RBI has cut its full year GVA forecast to 6.7%. In the absence of any meaningful private investment, the government needed to kick-start growth. Under the circumstances, taxing auto fuels consumed primarily by the better-off was a good way to enrich the exchequer, and the money could have been spent on projects that would have put money into the pockets of the less privileged and helped build assets like roads/railways.
The move to forego revenues is surprising since the government has not really managed to spend too much yet—just 44% of the expenditure target has been met in the five months to August. Also, a good chunk of this relates to revenue expenditure on subsidies for food, fuel and fertiliser, though that too will help drive up consumption demand. Moreover, only 35% of the capex budget has been spent. Under the circumstances, the government must start spending faster; in particular, it must give banks the additional `25,000 crore of capital which will help them to drop lending rates and stimulate borrowing.
It is not clear now how much the government will be able to spend during the rest of the year since it may not want to overshoot the fiscal deficit by more than 30 bps, to about 3.5%. So far, direct taxes have netted the exchequer `2.24 lakh crore, up 15.5% and in line with the budgeted Rs 9.85 lakh crore. Corporate earnings are expected to pick up in the second half of the year, thanks to a weaker rupee and a pick-up in consumption during the festive and wedding seasons driven partly by the rise in salaries of state government officials. Also, it is likely a large part of the Rs 13,000 crore that consumers save on auto fuels, will be spent on other goods or services. However, although it is early days, there could be a shortfall in indirect tax collections given the teething troubles with the GST. While the total collections between April-August at Rs 3.6 lakh crore compares well with the target of Rs 9.3 lakh crore for the full year, the average monthly GST collections at Rs 38,400 crore in July-August are low compared to the break-even levels of around Rs 46,800 crore; so, it is critical to sort out the GST mess quickly. A bigger worry for the government is the Rs 2.88 lakh crore of non-tax receipts; apart from RBI’s lower dividends, the telecom sector could yield Rs 10,000 crore less than the estimated Rs 44,340 crore. Even if the disinvestment plan is a success and brings in the targeted Rs 72,500 crore, the government could have waited to give away assured revenues. And the pressure to give away more will mount if the economy continues to do badly.
