MOSL: ECOSCOPE-Fears of fiscal deficit slippage are exaggerated-Combined analysis of center and 16 states discards such fears

​ECOSCOPE: Fears of fiscal deficit slippage are exaggerated; Combined analysis of center and 16 states discards such fears

One of the serious contentions today, which has afflicted the analysis of the monthly accounts of the central government, is if the center has appropriately distributed the tax collection with states (especially collection under integrated GST, IGST). Based on the adjustments made to address this issue, conclusions are reached, which could be highly misleading, in our view. To address this, we have performed a combined analysis of the monthly accounts of the center and selected 16 states (which account for ~80% of total spending by all states) to assess the likelihood of the government witnessing a shortfall in taxes, and thus fiscal deficit, in FY18.

We believe there are two benefits of this analysis. (1) It helps to assess the overall tax receipts of the general government (center + 16 states) by removing the uncertainty involved in analyzing monthly data of the central government in terms of its appropriate distribution of taxes to states. (2) It gives us clarity on the likelihood of the general government breaching its fiscal deficit target for FY18.

Our analysis of the combined tax receipts of the center and the 16 states up to September 2017 reveals:

1. States' finances confirm weakness in tax receipts…: During the first two months of GST implementation (although GST became effective from July 2017, the taxes pertaining to July were collected in August 2017), the tax receipts of the 16 states grew only 2.3% YoY, as against 17.6% growth in the corresponding period last year and three-year average of 11.1%. Only four states - Maharashtra (MH), Odisha (OR), Punjab (PB) and Rajasthan (RJ) - witnessed higher growth in August-September 2017 compared to the past years.

2. …however, overall tax receipts in FY18 could over-shoot the budget estimates (BEs) for the first time in seven years: The combined tax receipts of the general government, however, grew 15% YoY in August-September 2017, marking the fastest pace compared to the corresponding period of the last six years (when it averaged ~11%). In fact, growth of 16.6% YoY in the combined taxes in 1HFY18 was the highest if we compare it to the corresponding periods of the last five years. Since tax receipts (like spending) grow faster in the second half in comparison to the first half, we estimate that the total tax receipts of the general government could over-shoot the BEs by at least INR410b - INR27.57t v/s BE of INR27.16t. Even if we adjust the estimates of tax collection in 2HFY18 for the loss in taxes due to the recent changes in GST rates (~INR75b for the remaining FY18) and a cut in excise duty on fuel products (~INR130b), tax collection would be higher by at least INR200b.