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ET Explains: The state of the fiscal in first six months

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Moody’s cited constraints on the part of the government to narrow budget deficit as the reason for the change in outlook
The fiscal picture in the first six months of FY20 looks not very encouraging. Things look even grimmer after Moody's on Friday changed the outlook on India from 'stable' to 'negative' due to persisting growth concerns. An outlook cut is usually the first step towards a ratings downgrade.

Moody’s cited constraints on the part of the government to narrow budget deficit as the reason for the change in outlook.

This comes close on the heels of official data that showed the government’s fiscal deficit crossed 92 per cent of the full-year target in just the first six months. More importantly, the government may have to compress spending for the rest of the year to rein in the fiscal deficit to 3.3 per cent which was budgeted for FY20. The numbers have a lot to tell about the state of the fiscal health for the first six months.

How bad is it?
The fiscal deficit figure of 92.6 per cent for the first half of FY20 is lower than the 95.3 per cent in the same period last year, but that is basically because of the one-time windfall from the RBI which helped the government cushion its finances.

The RBI will transfer Rs 1.76 lakh crore as dividend and surplus following a report from the Bimal Jalan committee. The numbers on the fiscal front could have been a lot worse in the absence of this windfall.

Bleak forecast
Fitch raised the fiscal deficit target to 3.6 per cent from 3.3 per cent budgeted for the current fiscal on account of poor GST collection and slashing of corporate tax rate. The rating agency said: "We are revising our revenue growth forecast to 8.3 per cent (from 13.1 pe cent previously), which is significantly below the government's budget projection of a 13.2 per cent growth,” it said. Even Moody’s downgraded its outlook to negative from stable citing constraints on the part of the government to narrow budget deficit.

Capital spending is a must to revive the economy, and the government's refusal to borrow fresh funds from the market has aggravated concerns about a likely breaching of the fiscal deficit target.

Muted tax growth
The main pain point for the government is muted tax growth in the first half largely because of the slowdown in economic activity.

Gross tax collection growth was the lowest in almost a decade, falling to 1.5 per cent in the first half of FY20. A higher growth witnessed in non-tax revenues aided the total revenue growth in the first half, helping the government keep its fiscal house in order.

Hope for a better second half
With economic recovery looking shaky and almost all major institutions downgrading India’s economic growth for the entire fiscal, the growth in tax revenue to match the budgeted target looks like an uphill task. GST collection for both September and October came in at below Rs one lakh crore mark, putting more pressure on non-tax revenue growth.

Air India, BPCL to the rescue?
The disinvestment scenario in the first half looked bleak with just over Rs 12,000 crore garnered through stake sale against a budgeted target of Rs 1.05 lakh crore for the entire fiscal.

However, the second half could see an increased activity on the disinvestment front with both Air India and BPCL coming to the government’s rescue. A successful stake sale in these two PSUs could bump up government’s revenues significantly.

The bottomline
Deficits are not entirely bad. The measures taken to pump prime the economy including the cut in corporate tax rate has already started showing effect on India Inc’s second-quarter earnings. Companies could use that surplus to boost investment or distribute it as dividends, both of which will help boost consumption.

Asset sale and auction of coal blocks and spectrum sale could offer some more relief. The Supreme Court verdict in the AGR case ordering telcos to pay close to Rs 1.3 lakh crore in the next three months could also boost revenue.

However, that would mean the government may have to forego revenue from spectrum auction as that may be put off till next fiscal owing to increased stress on telecom operators.
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