Lockdown bleeds government finances dry

by Manasi Swamy

Central Government’s gross fiscal deficit overshot its annual budgeted target for 2020-21 by rising to Rs.8.2 trillion in the first four months of the fiscal. Budget estimates approved by Parliament have already lost their significance as the government’s move of raising its market borrowing target for the year by Rs.4.2 trillion has made it amply clear that the deficit would turn out to be much higher than budgeted. The real concern is that the deficit has not ballooned due to additional government expenditure to fight the Covid-19 pandemic. It has expanded due to drying up of government resources.

Government’s non-debt receipts plummeted by 41.7 per cent to Rs.2.3 trillion during April-July 2020, compared to their year-ago level. The year started with a very steep fall in non-debt receipts of the order of 71.8 per cent in April 2020. The intensity of the fall reduced to 63.5 per cent in May 2020 and further to 24.3 per cent in June 2020 as the unlock process began in India. But, instead of reducing further, the y-o-y fall in receipts once again aggravated to 27.9 per cent in July 2020.

Gross tax collection, the single largest source for financing the Central Government’s expenditure, contracted y-o-y by 29.5 per cent to Rs.3.8 trillion during April-July 2020. The two major direct taxes income tax and corporation tax suffered 29.1 per cent and 39.2 per cent drop, respectively. Among indirect taxes, collections of goods & services tax (GST) declined by 34.5 per cent, while customs duty collections shrank by 54.1 per cent. Excise duty was the only major tax head that reported a rise in collections. This increased by 23.8 per cent during April-July 2020, owing to aggressive rate hikes by the Centre on petrol and diesel from Rs.22.98 per litre and Rs.18.83 per litre, respectively, on March 14, 2020 to Rs.32.98 per litre and Rs.32.98 per litre by May 6, 2020.

In fact, if we exclude the contribution of excise duty, the y-o-y fall in gross tax collections during April-July 2020 aggravates to 53.3 per cent. Moreover, the monthly trend in tax collections does not show much improvement during the unlock phase after exclusion of excise duty. The y-o-y contraction in gross taxes excluding excise duty measured 44.4 per cent in April, 37.2 per cent in May, 28.3 per cent in June and 35.6 per cent in July. Of these, income tax and corporate tax, which reflect the supply-side performance of the economy, witnessed a 10.8 per cent y-o-y fall in collections in April. The fall intensified to 35.2 per cent in May, 39.9 per cent in June and further to 42.2 per cent in July. Indirect taxes - GST and customs duty, which are indicative of the demand-side performance of the economy, saw a 70 per cent slump in collections in April. The fall moderated to 37.7 per cent in May and 9.5 per cent in June, only to intensify again to 32.6 per cent in July 2020.

The Centre transferred Rs.1.8 trillion to the state governments during April-July 2020 as part of their share in central taxes. The amount was 12 per cent lower than the devolution of funds during the same period last year. The Centre parted with 73 per cent of its gross tax collections during the first two months of 2020-21. However, in the following two months, it transferred only a third of its gross tax collections to the states.

In the Union Budget 2020-21, the government had promised a transfer Rs.7.8 trillion out of its Rs.24.2 trillion budgeted gross tax collections during the year. This implied a robust 20.5 per cent rise in fund transfers over the devolution last year.

Lower-than-budgeted devolution of funds and refusal of the Centre to compensate states fully for their loss of tax revenue due to introduction of one nation one tax GST, has brought state finances under severe stress. Union Finance Minister Nirmala Sitharaman, in the GST Council meeting held on August 27, 2020, pegged states’ GST compensation requirement for 2020-21 at Rs.3 trillion. She promised to transfer the entire Rs.650 billion compensation cess that the Centre hopes to collect this year. She estimated the compensation requirement of states arising out of revenue loss due to introduction of GST to be an additional Rs.970 billion and attributed the balance Rs.1.35 trillion as a shortfall due to the ‘Act of God’. She presented two options before the states. First, the states avail Rs.900 billion loan from the RBI which will be repaid through compensation cess later. In the second option, states were asked to finance entire Rs.2.35 trillion through market borrowings under different terms.

Many states have refused to accept either of the two options given by the Centre. State governments have limited avenues to raise debt and non-compensation of GST loss by the Centre would compel many of them to cut their expenditure sharply in 2020-21, which is the last thing the Indian economy wants right now.

Shortfall in tax collections has impaired the Centre’s own ability to spend too. Central government expenditure rose y-o-y by 11.3 per cent to Rs.10.5 trillion during April-July 2020. When adjusted for 6.7 per cent inflation, it translates into an even weaker increase of 4.6 per cent.

Apart from tax collections, the Centre is struggling to mobilise funds through other sources too. Its non-tax revenues during April-July 2020 declined y-o-y by 43.9 per cent to Rs.246 billion. These mainly comprise of dividends from central public sector enterprises (CPSEs) and the Reserve Bank of India (RBI), license fees and income from leasing of natural resources. The RBI, in August 2020, announced a dividend transfer of Rs.570 billion to the Central Government. This is likely to have improved the government’s cash flow for time being. But, it needs to be noted that the RBI dividend, in fact, was a tad lower than the Rs.600 billion dividend the government had budgeted for 2020-21.

The government has set an ambitious and record disinvestment target of Rs.2.1 trillion for 2020-21. It, however, has not made any progress on this front so far. The thrust of the disinvestment program is on strategic sale of Air India and BPCL. But, the government has already had to postpone the deadline for expression of interest in the PSUs multiple times due to lack of market interest. The other big ticket disinvestment on cards is Life Insurance Corporation’s (LIC) initial public offering (IPO). This can fetch the government Rs.800-900 billion. But, along with a few smaller disinvestments like HAL, IRCTC, etc, it can help the government achieve only half of its annual disinvestment target.

The Indian economy currently needs a big fiscal push to come out of the slump caused by the Covid-19 induced lockdown. Private consumption and investment demand both have tanked and the monetary stimulus is not helping much. The inability of the Central Government to raise adequate resources and its aversion towards spending through monetisation of its own deficit poses a risk to the Indian economy of getting stuck into a low growth trap.

1. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001031010000000000&repnum=20646&frequency=M&colno=1
2. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001031010000000000&repnum=20671&frequency=M&colno=1
Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.1 -0.7
Consumer Sentiments Index
Base September-December 2015
58.2 0.0
Consumer Expectations Index
Base September-December 2015
60.1 0.0
Current Economic Conditions Index
Base September-December 2015
55.2 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Sep 20 Dec 20 Mar 21 Jun 21
New projects 2.53 1.42 2.13 2.74
Completed projects 0.77 0.86 1.15 0.71
Stalled projects 0.08 0.31 0.26 0.32
Revived projects 0.27 0.15 0.22 0.12
Implementation stalled projects 0.09 0.20 0.32 0.25
Updated on: 26 Sep 2021 3:28PM
Quarterly Financials of Listed Companies
(% change) Sep 20 Dec 20 Mar 21 Jun 21
All listed Companies
 Income -6.3 1.6 14.8 42.0
 Expenses -10.3 0.1 7.3 42.2
 Net profit 47.9 58.3 325.4 124.7
 PAT margin (%) 8.4 8.4 8.9 9.0
 Count of Cos. 4,430 4,450 4,355 4,324
Non-financial Companies
 Income -10.5 0.2 17.5 60.8
 Expenses -14.2 -0.8 10.4 62.9
 Net profit 31.8 54.7 232.8 178.2
 PAT margin (%) 8.1 8.8 9.0 8.4
 Net fixed assets 5.9 2.3
 Current assets 0.8 4.6
 Current liabilities -1.8 0.8
 Borrowings 8.5 -4.2
 Reserves & surplus 3.7 12.0
 Count of Cos. 3,282 3,304 3,251 3,239
Numbers are net of P&E
Updated on: 26 Sep 2021 3:28PM
Annual Financials of All Companies
(% change) FY19 FY20 FY21
All Companies
 Income 13.3 0.2 -1.4
 Expenses 13.6 0.2 -3.7
 Net profit 15.2 -10.4 39.8
 PAT margin (%) 2.1 2.1 7.7
 Assets 9.8 8.5 13.4
 Net worth 8.5 4.4 15.1
 RONW (%) 3.8 3.5 9.5
 Count of Cos. 31,749 30,612 4,154
Non-financial Companies
 Income 14.0 -1.7 -3.9
 Expenses 14.2 -1.4 -5.6
 Net profit 21.4 -21.1 25.5
 PAT margin (%) 2.9 2.4 7.3
 Net fixed assets 5.6 10.0 3.6
 Net worth 7.9 2.1 13.3
 RONW (%) 6.4 4.9 10.7
 Debt / Equity (times) 1.0 1.1 0.6
 Interest cover (times) 2.3 2.0 4.3
 Net working capital cycle (days) 74 81 64
 Count of Cos. 25,424 24,480 3,033
Numbers are net of P&E
Updated on: 20 Sep 2021 8:43AM