Finance Ministry (Image: PTI)
With the first six months of 2021-22 almost over, senior economic policymakers are confident of meeting the fiscal deficit target for the year, encouraged by strong tax revenue and a broad-based recovery across most sectors following the second wave of Covid-19.
Finance Minister Nirmala Sitharaman had budgeted a fiscal deficit target of Rs 15.07 lakh crore, or 6.8 percent of nominal gross domestic product, for FY22. The fiscal deficit for FY21 was revised to Rs 18.49 lakh crore, or 9.5 percent of GDP, from a budget target of 7.96 lakh crore, or 3.5 percent of GDP.
Although expenditure commitments are higher than budgeted, the Centre’s fiscal position is “more than comfortable” and there is even “firepower to spare in case we need to provide further economic support to some sectors,” a top policymaker told Moneycontrol
“Direct tax and goods and services tax collections have been very strong... we have seen strong recovery across sectors after the second wave, which is an encouraging sign that tax revenue will be healthy in the second half of the year as well,” a second official said.
Officials conceded that the possibility of a third wave of Covid-19 is a big “known unknown” but are hopeful the economic impact won’t be as severe.
“First, the pace of vaccination has been strong, and second, state and district administrations have learnt to deal with containment zones in a much more efficient manner, thus ensuring that economic activity does not come to a halt,” the first official said.
Healthy Tax Collection
Net direct tax collections jumped 74 percent to Rs 5.71 lakh crore in the April 1-September 22 period from Rs 3.27 lakh crore a year earlier, according to data released by the finance ministry last week.
Officials are enthused that net and gross direct tax collections are higher than pre-pandemic 2019-20 levels as well. Net collections as of September 22 were 27 percent higher than Rs 4.49 crore in the same period of 2019-20, before the pandemic struck.
“Gross direct taxes till September 22 stand at Rs 6.46 lakh crore compared to Rs 4.39 lakh crore in the corresponding period of the preceding financial year, registering a growth of 47 percent,” the finance ministry said.
Gross collections till September 22 were 16.7 percent higher than the same period in 2019-20.
“The sharp jump in direct tax collections has benefitted from the formalisation of the Indian economy, which was already under way but has been accelerated by the pandemic,” said Aditi Nayar, chief economist with ICRA. “The healthy expansion in gross tax revenues in H1 FY2022 relative to the pre-Covid level augurs that the upturn will sustain in the second half as well, even though a normalising base may dampen the pace of growth going forward.”
Gross GST collections for the current fiscal year stood at Rs 5.65 lakh crore as of August 31. GST collections came in at Rs 1.12 lakh crore in August compared with Rs 1.16 lakh crore in July.
The collections were above the Rs 1 lakh crore mark for the second consecutive month, indicating that the economic recovery was well under way as most states with manufacturing bases showed healthy growth.
GST collections had consistently stayed well above the Rs 1 lakh crore mark from October 2020 to May 2021. However, it slipped to Rs 92,849 crore in June, reflecting the economic disruption caused by the second wave.
Expenditure Curbs Removed
The Centre has been so encouraged by the tax revenue that the finance ministry’s expenditure department last week lifted spending curbs placed on departments of various ministries, allowing them to spend only 20 percent of their annual allocation in the July-September quarter as opposed to 25 percent.
The departments affected included those in the ministries of civil aviation, coal, commerce, corporate affairs, finance, home, defence services (revenue), food processing, fisheries and heavy industries. The ministry had cited the situation arising out of Covid-19 for regulating quarterly expenditure.
“The clear upturn in tax revenues and the anticipated inflows from the National Monetisation Pipeline are likely to have triggered the welcome withdrawal of the extant guidelines,” Nayar said. “With the withdrawal of the expenditure management guidelines, we anticipate that spending will gather pace in the second half of this year, which will be critical to unleash animal spirits and drive a faster recovery in economic activity.”
The National Monetisation Pipeline envisions the leasing out of Central government assets valued at about Rs 6 lakh crore over a four-year period ending in 2024-25.
Officials are not worried about the additional expenditure burden this year.
“Tax revenues have been good, the Reserve Bank of India surplus was a boost for us and even divestment will pick up in the second half of the year. The additional spending burden is likely to be balanced out,” said the second official.
The additional fertiliser subsidy this year will be Rs 14,775 crore and extension of the free food grain scheme under Pradhan Mantri Garib Kalyan Yojana will cost the exchequer Rs 94,000 crore. With the extra Rs 15,000 crore that the government is expected to spend after centralising 75 percent of the vaccine procurement, the additional expenditure could go up to Rs 1.72 lakh crore this year, over and above the budget size of Rs 35 lakh crore.