Improved finances gives Centre leeway to slash fuel excise duties, but a renewed spending spree is avoidable

Synopsis: Reasons for the increase in Centre’s gross tax revenues during April-September 2021.

Introduction

The Centre’s gross tax revenues have grown 64.2% year-on-year during April-September. This has resulted in a reduced fiscal deficit for the first half of 2021-22 that is, just 35% of the budget estimate for the whole year.

According to the Swiss investment bank Credit Suisse, this is the lowest since 2007-08 and way below the 10-year-average of 74%.

What are the reasons?

There are two probable reasons for the above,

One, due to the increasing formalisation of the economy. Demonetisation, GST (goods and services tax) and the lockdown have led to organised sector firms gaining market share from informal enterprises.

Two, improved tax compliance. For instance, e-way bills and other systems now for tracking transactions and plugging leakages, has translated into overall improved tax compliance.

Three, increased corporation and income tax collections. For example, corporation and income tax collections during April-September 2021 was higher than their corresponding respective levels for April-September 2019.

Four, increased fiscal resource through petrol and diesel taxes. The Centre’s revenues from excise duties (mainly on fuels), have grown 79% over the same period two years ago.

What should be the way forward?

First, the Centre should start consolidating its fiscal gains. That is important in the current scenario where yields on its 10-year bonds have been increasing. With most central banks signalling their intent to suck out excess liquidity in response to inflation concerns, the pressure on yields may only go up.

Second, Improved finances gives the Centre enough space to slash fuel excise duties necessary to curb inflation expectations.