Borrowing is an unambiguous term conveying liability. Whether it takes place through government securities or treasury bills, it indubitably involves net liability to the exchequer. Hence, the government move to borrow an additional Rs 50,000 crore from the market over and above the budgeted Rs 5.80 lakh crore, against the backdrop of falling revenue receipts, is a significant decision for more than one reason. Those who want the government to loosen its purse strings seem to have won under the Narendra Modi dispensation. Hawks who mooted a tighter borrowing regime and adherence to fiscal consolidation appear to have been relegated to the sidelines. However, the additional borrowing of Rs 50,000 crore in the next two months only goes on to prove that government finances may not be in the best situation as the Modi’s economic managers want it to be. In short, the fault lines are showing up in public finances management. Besides, growth has moderated for the last seven quarters.
Frittering away what has been achieved to date with great difficulty in terms of fiscal consolidation can never be good financial management. Fiscal deficit should be reined in within 3 per cent and revenue deficit phased out over the next two years as per the plan charted out as part of the mid-term five years’ economic review. Now, with fresh borrowing on the horizon, the targeted 3.2 per cent fiscal deficit is almost certain to be surpassed. Given the huge demand on funds in an election year, the intelligent but logical expectation would be to overspend ahead of the next Lok Sabha elections in March 2019. Faced with this reality, the scope for reining-in fiscal deficit may be limited. As many economists have estimated, fiscal deficit may continue to be retained at 3.5 per cent in the next financial year as well. And, this may ultimately become the new norm in managing macro-economic fundamentals.
The Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel had forewarned the government on fiscal profligacy. Sticking to a conservative spending plan may eventually show up on economic growth data. But smart leveraging of available resources would have allowed finance minister Arun Jaitley to set the house in order and still touch the till now elusive GDP growth of 7 per cent this fiscal. Given the five-month lead in estimating about Rs 50,000 crore shortfall in tax revenues, Jaitley should have countered this slide after having made tall claims of unearthing black money, huge data mining post demonetisation to nail tax dodgers and inspiring revenue officials to stick with earlier targets.
One can understand some disruption in indirect taxes revenues and projected shortfall of Rs 25,000 crore to Rs 35000 crore in the aftermath of GST roll out in July. Shortening the duration for stabilising the GST regime with minimal disruption could have been achieved without pandering to flimsy demands of trade and industry to withdraw e-way bills during the first five months. Even if e-way bills were re-introduced in phases, it will take at least six months for the government to normalise and achieve double-digit growth in indirect taxes collections. There is no reason why direct taxes collection should fall by a massive Rs 20,000 crore.
Perhaps the entire revenue mobilisation machinery and the Modi government have not been on same page. Bringing about a convergence within the taxation department and government’s thinking on assessments, raids, reviews and taxation disputes is important. Scaling down the short duration borrowings by over Rs 60,000 crore through treasury bills is an achievement the Modi government will have to cherish. But bringing about cohesion in revenue mobilisation and spending patterns was one of the stated objectives of the tax reforms. Achieving 7 per cent growth within the previously targeted borrowings while keeping inflation at the 4 per cent level is still doable, but with deft management.