Regaining fiscal balance

Synopsis: The advance tax numbers suggest growth in revenue collection continues to remain strong. However, Central government finances would need careful management.

Introduction

In the current financial year, the fiscal position has improved significantly and the recovery in revenue collection has surprised many.

By July-end, the government collected revenue worth over 37% of its Budget Estimate (BE) for the current fiscal year. The comparable number in the last fiscal year was about 11%.

Better than expected revenue collection has also resulted in a lower fiscal deficit so far. The government is targeting to contain the fiscal deficit at 6.8% of gross domestic product in the current year, compared to 9.5% last year.

Why Central government finances would need careful management?

High expenditure to be incurred in Welfare programmes: According to Finance Secretary T V Somanathan, the government is also incurring expenditure above the BE. For instance, the government reintroduced the distribution of free food grains during the second wave, which is likely to cost about Rs 1 trillion.

Decreased revenue from non-tax receipts: The government appears to be cautious on committing additional spending despite higher tax collection because non-tax receipts can be significantly lower than the BE. For instance, it is unlikely to meet the disinvestment target.

What steps need to be taken?

In the present situation, the government can boost spending without creating permanent programmes, such as those involving cash transfers.

Pushing capital expenditure, which has been lagging so far in the current fiscal year, could be one possibility. Since the tax collection is likely to exceed the budget estimate by a significant margin, the government can use the additional fiscal room to push capital expenditure.

GST Council should rationalise tax rates: The end of compensation payment for goods and services tax (GST) shortfall from July next year will increase fiscal risk for many states. Extending the compensation mechanism will not be feasible because the cess collection beyond June 2022 will be used to repay debt raised in the last and current fiscal year to pay compensation. In this context, The GST Council should rationalise rates as soon as possible and take them to the revenue-neutral level.

This will not only improve the fiscal situation for states but also provide greater stability to central government finances and help draw the medium-term consolidation road map.

Source: This post is based on “Regaining fiscal balance” published in Business Standard on 23rd Sep 2021.