Slowing Growth, Below Par GST Collections, Fiscal Deficit New Headache for Government


New Delhi: Three separate economic data points released last week could create a new headache for the government, which is still putting out the fires it ignited by releasing the GDP back series data in the same week.

Economic growth is a major worry particularly now, since there has already been intense politics over the rate of growth during the two terms of the UPA government (through the back series data) versus the present regime, very close to the 2019 Lok Sabha elections. And with the fate of the ruling BJP hanging in balance as crucial state polls are at various stages of completion, the narrative of robust economic growth during the current government’s last few months in office becomes even more crucial.

But this, a benign narrative about having ushered in robust economic growth, is not easy to craft. First, the November gross GST collections came in, showing that the anecdotal Rs 1 lakh crore monthly collection mark has been missed again. The Finance Ministry put out a statement which showed that collections totalled Rs 97,637 crore last month.

The second pain point emerged when it became known that GDP growth slowed down in the second quarter versus the April-June period and after galloping for four consecutive quarters. India remains among the fastest growing economies in the world and several external factors were to blame for this state of affairs but the data on Q2 growth has been used by analysts to predict that economic growth in the second half of the fiscal year – October to March – will be even slower than the first half.

And finally, the fiscal deficit number released by the government for April-October also proved worrisome, as the country has already breached the target set out for the entire fiscal in these seven months.

Of course, not every chance of things improving in the coming months can be ruled out. The Centre could dip into the states’ share in GST collections, it could postpone certain expenditure items, overall tax collections could surprise or there could be a last minute burst of activity on disinvestment.

Any or all of these actions could make the government remain within its fiscal deficit target. As ratings agency Care Ratings pointed out, the government meeting the fiscal deficit target of 3.3% for the year would be contingent on:

—Realisation of disinvestment target of Rs 80,000 crore (less than a sixth has been achieved till now)

—Higher GST collections. The collections so far have been lower than the target for 5 out of the total 7 months.

—The government has lowered gross borrowings by Rs 70,000 crore which will enable it to maintain the fiscal deficit target of 3.3%

But till all of the above happen, the narrative of robust growth under the present regime remains weak. The September quarter GDP growth stood at 7.1% versus 8.6% in the June quarter. The government described the numbers as “reasonable”, saying GDP growth in the first six months was at 7.6% and GVA (Gross value Added) at 7.4%.

“Growth in the second quarter is on higher base compared to the growth of the first quarter. Manufacturing growth on a base of 7.1% in Q2 2017-18 has been 7.4% in Q2 2018-19. Construction sector has grown by 7.8%. The Gross Fixed Capital Formation as a ratio of GDP has increased by almost 1.3 percentage points over Q2 of last year. Exports for Q2 have grown by 13.4%. The government consumption for the quarter has also significantly increased by 12.7%…. The Indian economy is on track to maintain a high growth rate in the current global environment.”

Ratings agency India Ratings noted that the Q2 GDP and GVA growth numbers were marginally lower than its expectations but “on the whole, second quarter GDP numbers do not ring in any alarm or indicate any serious deviation from the expected growth numbers. No doubt the sudden spurt in crude oil prices and depreciation in rupee had somewhat destabilising impact on the economy lately but over the past month they have corrected equally fast. India Ratings therefore believes that the FY19 may still end up with a GDP growth of 7.3%.”

And Care Ratings lowered growth forecast for the fiscal to 7.4% from 7.5% earlier due to “subdued pickup in economic activity in the second quarter and given the constraints in the financial system that would have a bearing on overall economic growth in the remainder of the financial year”.

As for GST collections, they tot up to Rs 7.76 lakh crore between April and November or a shortfall of about Rs 24,000 crore, averaging at about Rs 97,000 crore each month against Rs 1 lakh crore target. Achieving the revenue collection target is crucial as it has a direct bearing on the fiscal deficit. In the last eight months, tax mop-up has crossed Rs 1 lakh crore only twice — in April and October.

So with GDP growth cooling off, GST collections remaining below par and fiscal deficit remaining a worry, all eyes will be on the rabbits the Finance Minister produces from his hat in the interim Budget. If the ruling dispensation does not fare well in the state polls, perhaps a slew of fiscal sops cannot be ruled out. ​

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