By Devendra Pant

Central government's fiscal deficit in the first half of FY20 was Rs 6.52 trillion, 92.6 per cent of the full year target. This is similar to the proportion of last year (92.2 per cent). The fiscal deficit trend is a bit worrisome. Had there not been one time windfall gain from the Reserve Bank of India (RBI), the fiscal deficit would have looked much worse.

The worrying trend is the dismal performance of tax revenue. On quarterly basis, net tax revenue growth declined to 3 per cent in Q2 of FY20 from 6 per cent in Q1, leading to H1 FY20 net tax revenue growth of 4.2 per cent.

Net tax revenue has to grow 42 per cent to achieve the FY20 Budget target of Rs 16.5 trillion, which appears to be a daunting task.

The corporate tax, income tax and Goods and Services Tax (CGST, UTGST, IGST and Cess) collection growth in H1 FY20 has been 2.3 per cent, 8.9 per cent and -2.8 per cent, respectively.

However, backed by the RBI's surplus transfer, the total receipts growth improved to 27 per cent in Q2 of FY20 from 4.0 per cent in Q1, resulting in H1 FY20 growth of 18 per cent.

The disinvestment receipts in H1 FY20 has been muted and as against a budgeted target of Rs 1.05 trillion, only Rs 123.59 billion has been realised in H1 FY20.

However, confidence can be drawn from the disinvestment performance of the government in the last couple of years when they were able to surpass budgeted disinvestment target and majority of this happened in the third and fourth quarter.

While the receipts have been weak, the expenditure in the second quarter has increased sharply. Expenditure growth in Q1 of FY20 was muted due to election process and formation of government by the end of May.

Revenue expenditure grew 6.1 pert cent and capital expenditure contracted 27.6 per cent in Q1 of FY20. However, in order to provide some support to the dwindling economic growth, both revenue and capital expenditure growth increased sharply in Q2 of FY20 (revenue 23.3 per cent, capital 64.6 per cent), leading to 14.1 per cent growth in total expenditure in H1 FY20.

Higher expenditure growth in Q2 of FY20 will provide some support to economic growth which is affected by demand slowdown. Going forward, growth is likely to improve in H2 FY20 and that will translate in relatively better tax collection growth.

However, the corporate rate tax cut will limit upside direct tax collection growth. In all probability, the government will miss its FY20 fiscal deficit target of 3.3 per cent of GDP.