Lower tax inflows increase fiscal deficit worries
The fiscal numbers for the govt for the first 7 months are on expected lines
At a time when there was a lower tax and non-tax collection due to Covid-19, the collections coming from excise is the only solace.
All taxes except excise are lower: corporate Rs 1.72 lakh cr (Rs 2.72 lakh cr last year), income tax
Rs 2.03 lakh crore (Rs 2.44 lakh cr), GST Rs 2.05 lakh cr (Rs 2.85 lakh cr), customs 0.5 lakh cr (Rs 0.64 lakh cr). Non-tax receipts are also lower at just 30 per cent of target as against 72 per cent last year-the dividend component is lagging.
Last the non-debt capital receipts are way down and it is here that the government has to work hard to finish with the disinvestment process. Excise collections are the only component which is up, a CARE report says.
The fiscal numbers for the central government for the first 7 months are disappointing though on expected lines. The government has largely kept expenditure under check with total expenditure so far being 55 per cent of the budgeted amount compared with 59 per cent last year. This also has meant some cut in capex which is lower at 48 per cent of budget compared with 60 per cent last year.
Higher spending by the consumer affairs and rural development ministries has meant cuts in housing and rural development, defence, railways and roads to control overall expenditure. So where is the problem?
The problem is essentially on the revenue side where the collections have been lower for tax, non-tax, and non-debt capital receipts. For tax receipts there is less control as it is based on the state of the economy.
The fiscal deficit is at Rs 9.53 lakh crore which would be roughly 4.8-5 per cent of GDP if it holds for the full year.
We believe the deficit based on the expenditure allocations announced by the FM will double this amount taking the ratio close to 9-9.25 per cent for the year.
Hence while tax collections can increase in proportion to growth in the next 4 months, it may not be possible to recoup the losses in the first 7-8 months, the CARE report added.
The overall fiscal picture for the Government of India (GoI) for the April-October 2020 period remains grim, although the expansion in gross tax revenues as well as capital spending in the month of October 2020 are encouraging.
The government's gross tax revenues recorded a healthy 17 per cent growth in October 2020, marking the first month of expansion in this beleaguered fiscal year.
"The YoY uptick in gross tax revenues in October 2020 was fairly broad-based, led by excise duty, customs duty, CGST as well as income tax, mirroring the pre-festive upswing in a number of economic indicators," says Aditi Nayar, principal economist, ICRA.
Moreover, the pace of contraction in corporate taxes eased to a modest 5% in October 2020, which primarily reflects a favourable base effect related to the tax rate reduction in FY2020.
The monthly trend in expenditure is also encouraging, especially the 130% expansion in capital expenditure, even as revenue expenditure declined by 1.3% in the month of October 2020 despite a large increase in the outgo for food subsidy.
Our baseline estimate places the gross tax revenues of the government at Rs 9.2 trillion in the last five months of FY2021, only marginally lower than the Rs 9.6 trillion garnered in November-March of FY2020.
This is supported by the recent upswing in various lead indicators of the economy, brisk festive sales in many categories, robust excise inflows, and base effect related to corporate tax collections, are expected to boost tax generation in H2 FY2021, she added.
Overall, ICRA expects the net tax revenues of the Centre, non-tax revenues and disinvestment proceeds to together trail the budgeted level by Rs. 6.5 trillion in FY2021.
Central tax devolution to the states was reduced to Rs 372 billion in October 2020 from the level of Rs. 420 billion transferred in the previous four months. In our view, this is a precursor of the acute adjustment that lies ahead, as the government's shareable taxes are expected to fall sharply short of the budgeted level.
An ICRA estimate says that the government's total expenditure (excluding recovery of loans) at Rs 30.2 trillion in FY2021, mildly lower than the budgeted level, despite the fiscal support measures that have been announced so far. This translates into a projected expenditure (excluding recovery of loans) of Rs 13.7 trillion in Nov-Mar FY2021, which is a considerable 33.6 per cent higher than the outgo in the last five months of FY2020, and therefore may prove to be challenging to achieve despite the recent relaxation for Q3 FY2021.
It expects the Government's fiscal deficit to widen to R 14.5 trillion or 7.7% of GDP (assuming contraction of 7.5% in the nominal GDP) in FY2021 from the budgeted level of Rs 8.0 trillion, and Rs 9.4 trillion in FY2020.
With healthy inflows into small savings in the last few months, we do not foresee a further expansion in the Government's dated borrowing programme for FY21.