Come September outcomes fiscal blues

In the first half of fiscal 2020-21 Union government receipts are just 25% of budgeted annual receipts as opposed to 40% in the previous fiscal. Receipts tend to have a slow start but not this slow. We are Rs 2.7 trillion short of the Rs 8.4 trillion we collected as receipts last fiscal till September. This is not a surprise given the Covid body-blow.

Some light and less heat

What is welcome is that receipts in the month of September were up smartly by 30% over August – showing the “tax-bureaucracy” is wide awake! Nevertheless, receipts were lower than last September by 13%. This is a huge improvement over the gap in cumulative receipts between last year and the current one of 33% illustrating that the taxable (non-agricultural) part of the economy, which funds the government, is grinding back to work though it has yet to get back its mojo.

If the improving trend persists, the Union government might manage net receipts of Rs 17.5 trillion by fiscal end, the same as last year. This would be still be about Rs 7 trillion short of the budgeted net receipts this fiscal. Even this appears optimistic unless the, increasingly unlikely, disinvestment target of Rs 2 trillion (1.1% of GDP), is met. Forcing PSEs to buy back government shares and deplete their surpluses is one possible option which should be considered. 

The PSEs will then need to borrow cash for operations or front for masked government borrowing. Within limits, this strategy works, simply because listed and profitable PSEs are more efficient than government at managing their debt levels and debt servicing. Consider how publicly owned banks have steadfastly refused to pass lower interest rates through to borrowers (much to the detriment of the economy) till they recoup their provisioning and their losses. 

The downside is that such strong-arm tactics hollow out further the claim that PSEs are board (not ministry) managed entities. But the resultant negative optics are bearable, given the magnitude of the fiscal crisis and the fact that PSE shares of listed companies, by Price Earnings Ratio comparison, already lag their private counterparts for precisely this reason.    

Good job done by government

Readers would do well to appreciate how adroitly the government has moved to manage the crisis by minimizing the medium-term negative impact on fiscal stability. By September end the fiscal deficit was 115% of the annual target of Rs 8 trillion as the government struggled, like every good parent, to shield the less able from the sufferings imposed by Covid. The fiscal space (assuming end of year GDP at Rs180 trillion), if keeping the fiscal deficit within the high point of 6.6% of GDP under the UPA in 2009-10, is the Laxman Rekha, is just an additional Rs 2.7 trillion of borrowing. Achieving the disinvestment target becomes a crucial test.

With private economic engines, either locked indoors or severely constrained from going about their business, it is government expenditure which has partially filled the breach thus far. Expenditure have been maintained at 49% of the budgeted annual amount, despite the steep fall in revenues.

Continued effort on funding relief measures, free food for the bottom 60% of households and NREGA with ramped up wage support to the private sector and urgent steps to recapitalize banks to allow the RBIs monetary efforts to lower the cost of bank loans for end users, are desirable. 

The real issue is how to nuance such outlays to reduce waste and enhance value add whilst allowing market discipline to operate. 

Use “Value for Money” tools to ring fence priority expenditure

The Finance Ministry bureaucracy is pulling its weight in reallocating budgeted spending towards social protection measures (free food, NREGA), high employment sectors like construction and small and medium enterprises. But deeper assessment tools are needed to channelize expenditure even within a specific sector, scheme or mission to options across locations and project activities. Applying the Value for Money concept can help rank the spending options based on the “bang for the buck” – the social and economic outputs (assessing outcomes is fuzzier because the link with inputs is less tangible) for money spent over a fixed time period.

The need of the hour is two-fold. Spend money to generate direct employment and income enhancement but also keep sight of quickly monetizing the capital already spent through end of project benefits from operations. 

Most of the value addition only comes after a project is completed, not during the implementation of the project. This skewed dispersion of benefits towards operations is one reason why completing projects can be more important than initiating new ones. 

Say No! to vanity projects till we regain a long term growth rate of 8% per year

The single exception to this golden rule is “vanity projects” (statues to honor leaders, grand office buildings – Amravati is a good example as is the proposed Central Vista Complex in New Delhi- at a time when rents are falling, outlays far ahead of demand – empty roads to nowhere. Such projects should be moth balled till we are growing at our long-term growth rate of 8%, hopefully by 2023-24. 

The fiscal “Sweet Spot” is still quite far

Consider, that after factoring in inflation (CPI Industrial Workers 2001 series) , government receipts this year till September are just around 97% of receipts till September 2018. Nominal economic growth this year is expected at 8% above the 2018 level of Rs 154 trillion while inflation adjusted expenditure is 50% higher this year. It is any body’s guess how long we can afford to ignore this mismatch before we cross the tipping point into an uncontrollable spiral of economic and fiscal instability.

Much of the prevailing uncertainty about what government is up to, is derived from the hands-off “Forbidden City” type of standoffish prickliness which enrages “Khan Market types”, relieved only by periodic exhortations from high above targeted at the “common citizen”. This exclusionary strategy of public communication adopted by a “Big Government State” is exactly the opposite of what good governance demands. We ignore the soft messaging side of government only at our peril. Sadly, Covid encourages physical exclusion. But did we have to grab the opportunity offered so eagerly?

Also available at TOI blogs October 31, 2020

Correction – The Blog post incorrectly mentioned cumulative receipts till September 2020 being 109% of the same period in 2016 and expenditure at double of the 2016 level. This has now been corrected. Sorry

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