Revenue estimates fall short again raising fiscal concerns

Source: The post Revenue estimates fall short again raising fiscal concerns has been created, based on the article “Perils of overestimates” published in “Business Standard” on 11 June 2025. Revenue estimates fall short again raising fiscal concerns.

UPSC Syllabus Topic: GS Paper3- Economic-Government Budgeting.

Context: The provisional actuals for the 2024–25 Union Budget highlight a return to revenue overestimation. This reversal comes after four years of accurate forecasts and raises concerns about fiscal management and potential economic slowdown.

Recurring Challenge of Revenue Overestimation

1. A Troubled First Budget (2019–20): In 2019–20, actual net tax revenue was 13.6% lower than the Revised Estimate (RE). Non-tax revenue also fell by over 5%. With only marginal change in expenditure, the fiscal deficit widened to 4.6% of GDP, against the RE figure of 3.8%.
2. Forecasting Improved (2020–21 to 2023–24): Over the next four years, the finance ministry showed commendable restraint in its estimates. Actual revenues exceeded REs, with net tax collections increasing by 0.13% to over 6%. Expenditure stayed controlled, keeping the actual fiscal deficit lower than the RE.
3. Problem Resurfaces (2024–25): In 2024–25, the provisional actual net tax revenue was 2.3% lower than the RE. This ended the trend of conservative budgeting and brought back the issue of overestimation.

Personal Income-Tax Underperformance

1. Sharpest Decline Observed: The biggest drop was seen in personal income-tax collections, which were about ₹74,000 crore or 6% below the RE.
2. Rising Importance of This Segment: Over six years, personal income-tax has grown from one-fourth to nearly one-third of gross tax collections. This makes its underperformance more significant.
3. Expenditure Cutback in Response: Due to revenue shortfalls, the government reduced revenue expenditure. The Budget Estimate (BE) was ₹37.1 trillion, RE was ₹36.98 trillion, but provisional actuals dropped further to ₹36.03 trillion.

Expenditure Trends and Fiscal Balance

1. Capital Expenditure Increased: While revenue spending dropped, capital expenditure rose, showing a positive shift in spending quality.
2. Deficit Ratio Unchanged: The fiscal deficit remained at 4.8% of GDP, largely because the nominal GDP was revised upwards. This helped maintain the percentage despite lower revenue.

Dangers of Inaccurate Estimates

1. Confusing Economic Signals: Large differences between RE and actuals send misleading messages about the fiscal situation. Ministries may be forced into last-minute spending cuts.
2. Risk of Distorted Budgeting Practices: This can lead to shifting liabilities to public entities or using off-Budget borrowings, which had been phased out earlier.

Revenue Trends and Growth Insights

1. Estimates Reflect Activity Levels: Overestimations in 2019–20 aligned with a slowdown. Underestimations from 2020 to 2024 matched a period of economic recovery.
2. Slower Growth in 2024–25: GDP growth slowed to 6.5%, down from 9.2% in 2023–24. This may explain the weaker revenue performance.
3. Need for Better Projections: With rising global uncertainty, accurate revenue forecasting is vital. Fiscal discipline must include realistic revenue and expenditure projections.

Conclusion

The return of revenue overestimation in 2024–25 must be addressed. The government should investigate the reasons, especially for falling personal income-tax collections, and work toward more accurate and credible fiscal projections.

Question for practice:

Examine the reasons behind the return of revenue overestimation in the Union Budget 2024–25 and its implications for fiscal management and economic growth.