While the fiscal deficit till now has already crossed the annual budget estimates, the pending GST compensation to the states may burn a deep hole in the government’s pocket this year. The GST compensation requirement of just nine states is likely to double to Rs 60,000 – 70,000 crores in FY20, according to a rating agency ICRA. It also estimates that the central tax devolution – a share of central tax given to states to spend on their discretion – to these states in the current year could be Rs 59,500 – 77,000 crores lower than what the government has budgeted. This may come as a double-edged sword for the government as it is already struggling with low tax revenue collection and the burden of the fiscal measures announced lately.
Though the government has recently increased the GST collection target for the remaining months of the year, the annual target seems quite difficult to achieve with the current average. The slow economic growth and the reduced rates of GST on many articles have adversely affected the GST collections during April-November 2019.
“For the centre, the front-loading of revenue expenditure and fiscal deficit in Q1, results in the build-up of fiscal pressure in Q4, making revenue generation a key priority in the latter part of the year to manage the fiscal deficit target,” said RBI.
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Funds crisis in the states have already slowed down India’s investment activities in recent years, now the lower central tax devolution may further hit the sentiment. A cut in expenditure below the budgeted amount seems to be imminent in the current fiscal, says ICRA.
“ICRA anticipates that the combined SGST revenues and GST compensation grants in FY20 would be Rs 10,600 crore lower than the level budgeted by these states. This poses a modest revenue risk for FY20,” said Jayanta Roy, Group Head – Corporate Sector Rating, ICRA Ltd.
Given the likely shortfall in the revenue receipts of the states in the sample, a compression in their spending may be necessary to adhere to their respective fiscal deficit targets in the current fiscal, he added. Meanwhile, it is also expected that the government’s actual gross tax revenues may miss the annual target of Rs 24.6 lakh crore by a considerable Rs 3-3.5 lakh crore.
Source: Financial Express