After the Finance Minister had spelt out details of the economic package which was supposed to be the Government’s response to the economic fallout of the Covid-19 pandemic and lockdown, the hoax of it having a size equivalent to 10 per cent of GDP (Rs. 20 lakh crores) was quickly seen through by everyone. Almost all estimates put the fiscal implication of the package at around 1 per cent of GDP or thereabouts, evidence of the fact that the Modi government was extremely wary of responding to the crisis by stepping up spending. However, this too may be an overestimate because there was another side to the package, namely the extreme stinginess in providing financial support to cash strapped state governments which are at the frontline of battling the virus. The adverse implications this will have for the spending done by State governments will only serve to magnify the problem of public expenditure levels in India falling woefully short of what the health crisis as well as its economic consequences demand.
The extreme stinginess of the Modi government reflects a strange situation where there appears to be a rare ‘consensus’ that the Government is not doing enough. Even those who usually are responsible for the cacophony about the allegedly terrible consequences of Government ‘profligacy’, for whom government not doing enough normally means that it hasn’t cut down public expenditure adequately, appear to have crossed over even if temporarily to the side of the advocates of the need to up public spending. So why then is the Government going against the consensus? The answer, is that the ‘bold’ Modi Government is paralyzed by fear, immobilized by the onrushing catastrophe of a fiscal crisis that is of its own making. It is therefore doomed to repeat the folly of thinking like a miser – that it will somehow have more money if it spends less. The problem is that it will take in the process the whole country, in particular the working people, down the path of economic devastation.
Revenues Falling Since Last Year
No amount of talking and spin can conceal the fact that Government finances in India are in an utter mess because revenues are collapsing. It is important, however, to remember that this collapse began before anyone in the world had heard about the Novel Coronavirus. For the financial year 2018-19, the Union Budget had estimated a growth in Gross Revenues from Central Taxes of 18.4 per cent over the actuals in the previous year, that is 2017-18. The final increase, however, fell way short at just 8.4 per cent, below the increase in nominal GDP, which was 11.2 per cent. Then, in 2018-19 as the slowdown in the economy became worse, and the Government gifted the corporate sector with a mid-year tax cut, the revenue crisis became worse. As against the original budget estimates of 18.3 per cent increase in Gross Central Taxes, the Revised Estimates included in the Union Budget for 2020-21 were forced to bring the expected increase down to just 4 per cent over the already low 2018-19 figures. This was on 1 February 2020, still before the Coronavirus became a factor and still looked like an optimistic estimate as the collections in April-January of 2019-20 were 2 per cent below those in the same period the previous year. Now we know the full year (April-March) figure from the Controller General of Accounts and it is 3.4 per cent less than in the previous year. Obviously, only a part of this, however, can be attributed to the Coronavirus impact in March 2020, when revenues from Central taxes contracted by 14.5 per cent compared to realizations in March of 2019.
Lockdown Damages Finances of State Govts. More
With the lockdown bringing economic activities to a grinding halt, the CGA also shows that revenue realizations in April 2020 have nosedived – for Central Taxes, the reduction compared to April last year has been to the order of 44.3 per cent. A large part of this is on account of GST revenues of the Central Government which have shrunk by almost 70 per cent, but even personal income tax collections have dropped by 32 per cent. The Government, in its typical style of thinking that bad news can be made to disappear by concealing it, has so far failed to make public the gross GST collections in April and May 2020 (usually released on the 1st of every month for the previous month). However, the story of Central revenues from GST and particularly the almost 89 per cent decline in the GST Compensation Cess collections serve to confirm the reports of State Governments facing a collapse of GST revenues.
The revenue crisis in fact is hitting the states even more than the Centre. The shortfalls in Central Taxes also hit state government revenues because they are entitled to a certain share in Central Taxes. The amount of this share dropped from Rs. 7,61,454 crores in 2018-19 to just Rs. 6,50, 677 crores in 2019-20 – a 14.6 per cent fall. In addition, the Central Government has also passed on the burden of the revenue crisis on to the states by withholding the GST compensation payable to the states for the December-March period. As such, even the claim by the Finance Minister that State Governments have been given their April 2020 share in Central Taxes as per the Budget Estimates involves a bit of doublespeak – the actual amount given, Rs. 46,039 crores, is 7.1 per cent less than what was transferred in the same month last year and well below the monthly average of 2019-20 (which itself as mentioned earlier was below the 2017-18 level).
Worse is Yet to Come
The April 2020 revenue realization situation is the first indication that 2020-21 revenues are also going to be exceptionally poor as the Covid-19 impact reinforces the existing slowdown. The Union Budget had assumed a 12 per cent increase in Central Tax revenues compared to the Revised Estimates for 2019-20, realizing which would require an almost 21 per cent increase over the actuals of last year. Even if the revenues are the same as last year, the total shortfall in Central Taxes would be to the order of Rs. 4.1 lakh crores compared to the Budget Estimates and the Net Revenues to the Centre would be down by around Rs. 2.8 lakh crores. If revenues shrank in 2019-20 when GDP apparently grew by 4 per cent, surely they cannot remain the same if the GDP contracts in 2020-21 as is now expected to happen?
Clearly, therefore, the upward revision in the Central Government’s borrowing target for 2020-21 by Rs. 4.2 lakh crores is mainly to cover revenue shortfalls and not to increase expenditure. This comes in the back of the borrowing last year also having had to go up as the Central Government’s fiscal deficit increased by 22 per cent over the Revised Estimates and ended up at a level of 4.6 per cent of GDP against the revised figure of 3.8 per cent! This is a level higher than in any year since Modi first came to power and in its eyes has already undone its six-year effort to reduce it by compressing public expenditures.
What scares the Modi government is that even if they clamour for or accept higher levels of expenditure today, international finance and the domestic big business interests will neither spare it for long if the fiscal deficit increases and nor will they want to pay the taxes tomorrow to reduce it. Its refusal to spend today is therefore its declaration of its undying love for them and its unwillingness to take them on in the interests of the Indian people. Love is blind as they say, and that is why the truth staring it in the face is invisible to the Modi Government – that by refusing to spend and not letting state governments do either, it is aggravating its own crisis of revenues. Such a refusal means the problem of deficient demand in the economy remains unaddressed and is in fact worsened. This has reduced the level of economic activity in the past and will make the Covid-19 related contraction worse – and economic activity is ultimately the source of revenues. Not taxing and spending thus ends up as a vicious cycle of less taxes and less spending reinforcing each other!