New Delhi, February 12: The 15th Finance Commission’s report for FY21 was an important factor on fiscal math of Budget FY21. The Commission’s task for current cycle was particularly challenging as the economy was undergoing structural adjustments due to demonetization, GST transition and consequent behavioral changes.
These changes further coincided with global slowdown and trade war. This has made the forecasting exercise for the five-year period difficult. The Commission was conscious of the above facts and recognised the challenges in revenue-raising for the government.
The formula for division of taxes has seen some changes from the past practices, notably introducing total fertility rate as a measure and incentivising tax effort. The Commission observed that financing capital expenditure through off-budget borrowings detracts from compliance with the FRBM Act. It recommended that both the central and state governments should make full disclosure of extra-budgetary borrowings.
Centre and state borrowings together with off balance sheet resources, account for 8 per cent of GDP.
“If we add Extra Budgetary Resources (EBRs) of Centre (Rs 1.9 lakh crore) with fiscal deficit component, then the overall deficit of the Centre may go up to 4.3 per cent in FY21 compared to 3.5 per cent of GDP as per FY21 BE,” said an analysis by SBI Ecowrap.
The government has reduced the food subsidy bill significantly by Rs 75,532 crore in FY20 revised estimate when compared to budget estimates. This is assumed to be taken off the budget and supposed to be financed from small savings. Interestingly, when the investment of National Social Security Fund (NSSF) is looked at it is observed that a significant amount in FY21 is allocated to Food Corporation of India.
In FY20, around 76.1 per cent of the additional investment of the fund in public agencies went to FCI. This has increased to 96.5 per cent in FY21. Gross amount of Rs 1.36 lakh crore is budgeted to be invested in FCI and considering the repayments of Rs 68,400 crore, the net amount of investment in FCI stands at Rs 68,200 crore.
It seems that a large portion of food subsidy bill is getting shifted to next year to be funded through NSSF. Going forward, the increased reliance on small savings, in turn, would make it difficult for the government to cut small savings interest rate and thus bank deposit rates might be impacted, the analysis pointed.
It analysed that given the change in the fiscal deficit values towards the upside, the public debt glide path will also change and the FRBM target of 40 per cent debt to GDP ratio if planned to be achieved by FY25 will clash with the expansionary policies expected to be pursued by the government.
“We estimate massive expenditure rationalisation and substantial increase in tax revenues so that the additional Rs 52 lakh crore worth of resources is generated to make interest and debt repayments to reach the debt target of 40 per cent of GDP by FY25,” stated the report.
According to IMF’s analysis also, if the government embarks upon the path of expenditure savings from rationalising subsidies as well as revenue gains from expanding the tax base, especially on personal income it would lower the debt-to-GDP ratio (Centre and State) to only 62.4 per cent by FY25.
“However, if we look at the sustainability perspective, most of our debt is domestic in nature and is of a longer time horizon. So there is slim chance of debt servicing becoming a solvency problem, though it will continue to impinge on liquidity,” the report added.