Perhaps the most troubling setback for the Indian government this year was the trouble in achieving targets it had set out in the Union Budget. These targets were based on optimistic economic conditions and with that having not played out, it’s important to look at how it will affect the finance ministry’s fiscal goals in 2020.
On account of the Lok Sabha elections in 2019, the Centre presented an Interim Budget in February 2019 and a full-Budget in July 2019. Every government has its own ways of achieving budgetary numbers, with the current government also having a mix of short term, medium term and long term goals.
The interesting point about setting targets is that when the factors affecting these targets are ceteris paribus, achieving them becomes less onerous. However, when the going gets tough, then adhering to them or even lowering them over time can become questionable.
Firstly, the government had initially set a monthly GST collection target of Rs 1 lakh crore. Since the implementation of GST in July 2017, the government has been able to achieve the target just nine times in 29 months, four of which are in the current fiscal.
The following table shows the broad rationale of selecting Rs 1 lakh crore as the target in FY19. In addition, the table also shows that an expectation of significant jump in GST collections in FY20 should have also led to an increase in targeted collections, which did not happen. Even though the actuals for 8 months (Rs 8.1 lakh crore) exceeded the target for 8 months (Rs 8 lakh crores), it is almost 1.1 lakh crores lower than the budgeted number.
Table 1: Average monthly GST collections based on Union and State government budgets (Rs crore)
|GST (as per Union Government Budget)*||6,65,430||7,64,021|
|SGST of all states||5,72,949||6,12,750|
|Average monthly (Rs crs)||1,03,198||1,14,731|
*includes CGST, UTGST, IGST and compensation cess
Source: Budget documents, RBI State Budget study, Authors’ calculation
So how have GST collections been when the overall economy has slowed down from almost 12% (nominal GDP growth) in June 2018 to 6% in September 2019?
The chart below juxtaposes quarterly nominal core gross value added (GVA) with quarterly GST collections and it can be seen that when nominal core GVA grew during Q3-FY19 to Q1-FY20, GST collections also witnessed a commensurate increase.
The quarterly core GVA in Q2-FY20, however, remained almost at the same level as in Q1-FY20 while the quarterly GST collections have witnessed a significant decline. The decline in GST collections in Q2-FY20 is a proxy highlighting the current economic deceleration. The lower than budgeted GST collections during the fiscal so far have led the finance ministry to revise this monthly target upwards to Rs 1.1 lakh crore for the remainder of the fiscal.
Chart 1: Nominal core GVA * (quarterly) vis-à-vis GST collections (quarterly)
Another long-term target which the government announced in February’s Interim Budget is that India is poised to be a $5 trillion economy by FY2024. Considering the recent weakness in the overall economy, the target could need some revision in the years to come. From FY20-FY24, India’s GDP growth will have to be in the range of 14-15% assuming an exchange rate of Rs 69-70 per dollar to achieve the long term goal. The vision of achieving a $5 trillion economy by FY2024 is a long way away and the focus should be to get the number of nominal GDP growth right without too much focus on the broader goal of $5 trillion.
The estimate of nominal GDP growth is critical as the fiscal deficit (as a % of GDP), the most important fiscal consolidation number hinges upon it. This ratio is a more formalised target as per the Fiscal Responsibility and Budget Management (FRBM) Act, based on which the government has targeted 2.5% by FY22-23. However, the N.K. Singh Committee of the FRBM Act has specified a deviation of not more than 0.5% to deal with unforeseen events, which include far-reaching reforms and sharp decline in real output growth of at least 3%.
The current economic slowdown has led to numerous sector-specific reforms following a perceptible reduction in quarterly GDP growth of more than 3%. The finance ministry should acknowledge this flexibility in the FY20(RE) number and the FY21(BE) number should be more veracious.
The fiscal math in the backdrop of the current economic slowdown has become complicated, given the various targets the ministry has set for itself. The focus of the forthcoming Budget should move away from these targets, concentrating on realistic revenue projections coupled with better quality of expenditure. Simply harping on these targets during the economic slowdown will complicate the fiscal math further.
These targets should either have some flexibility or should be in a band (like RBI’s inflation targeting framework of 4% +/- 2%) till the Indian economic cycle sees green shoots from the current slowdown.
Sushant Hede is an associate economist at CARE Ratings. Views expressed are personal.