Fiscal gains
Higher tax revenue will give more flexibility in pushing expenditure
The Union government’s borrowing plan for the second half of this fiscal year came as a surprise to those who had expected the number to go up to compensate the states for tax shortfalls during the pandemic. The government borrowed ~7.02 trillion of the projected ~12.05 trillion for the year in the first half, while the remaining ~5.03 trillion would be raised in the second half. This will also include borrowing for goods and services tax (GST) compensation. The government had announced that borrowing on account of GST compensation would be about ~1.6 trillion for this fiscal year. As the borrowing programme now includes GST compensation, borrowing to finance the Union Budget would be lower to that extent.
If the government manages to stick to the target, the final fiscal deficit number would be lower than the projected 6.8 per cent of gross domestic product. The government is banking on the increase in revenue collection and sustained economic recovery. Advance tax collection in the ongoing quarter, for instance, increased by over 50 per cent over the same period last year. Although growth in tax collection will moderate in the coming months because of the base effect, it is expected to maintain a robust pace. However, as recently highlighted by the finance secretary in an interview, the government is incurring expenditure over what was budgeted at the beginning of the year. The government restarted the free food grain distribution programme earlier this year, which is likely to cost about ~1 trillion. The Budget will also need to accommodate a higher fertiliser subsidy outgo and arrears for export incentives. On the receipt side, the government is likely to fall significantly short on the disinvestment front and will have to forgo part of non-tax revenue due to the relief extended to the telecom sector. But it is likely that the government expects to significantly improve its disinvestment tally, while higher tax collection would be more than sufficient to fund the additional expenditure.
Therefore, the final fiscal numbers could be significantly different from what the present situation suggests. This was also reflected in the muted reaction of the bond market on Tuesday. While there are concerns about non-tax revenue, higher tax collection would be fairly comforting for the government. If the performance on the non-tax side also improves, it will give greater flexibility to the government in pushing expenditure to support growth in the second half of the fiscal year and reducing borrowing. This will also be comforting for the Reserve Bank of India (RBI), which is maintaining excessively higher levels of liquidity in the system, largely to help the government complete its borrowing programme at a lower rate. A better than expected fiscal performance should encourage the RBI to start normalising the liquidity position. Excess liquidity in the system can affect inflation outcomes. The inflation rate was above the tolerance band in the last fiscal year and remains significantly higher than the target of 4 per cent. Alongside the current year’s position, financial markets would also look at the medium-term outlook. To a large extent, the fiscal situation in the medium term will depend on the strength and durability of economic recovery, which is not certain at this stage.