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Thursday, July 07, 2022

Economic Survey: Buoyant tax mop-up frees fiscal space for spending

Though output in various contact intensive services remained below pre-pandemic levels, it said the macroeconomic strength provided buffers against likely stresses such as withdrawal of stimulus by global central banks.

Written by Sunny Verma | New Delhi |
Updated: February 1, 2022 7:48:58 am
Union Finance Minister Nirmala Sitharaman. (PTI/File)

A DAY ahead of the Union Budget for 2022-23, the Economic Survey tabled in the Lok Sabha by Finance Minister Nirmala Sitharaman pointed out that buoyant tax revenues offered the government fiscal space to provide additional support to the economy and continue the push in favour of higher capital expenditure. Though output in various contact intensive services remained below pre-pandemic levels, it said the macroeconomic strength provided buffers against likely stresses such as withdrawal of stimulus by global central banks.

A sharp rise in tax collections and a boost to non-tax revenues following RBI’s surplus transfer have led to an increase in the revenue pool. This would enable the government to meet its fiscal deficit target of 6.8 per cent of Gross Domestic Product in 2021-22, the Survey said. “The targeted focus on capital expenditure, with its resulting multiplier effects, will be vital in sustaining the economic growth,” it noted.

The Survey — which is an economic report card for the current year — also argued that the banking sector was now well placed to support the economy as it is “well capitalised and the overhang of non-performing assets seems to have structurally declined.” As and when the demand for credit returns, the banks are there to support it, while higher government spending will crowd in private investment, said Sanjeev Sanyal, Principal Economic Advisor in the Union Finance Ministry.

Elevated government spending, along with a push in capital spending, is possible as the revenue receipts of the Central government during April- November 2021 have increased 67.2 per cent (year-on-year), as against the 9.6 per cent growth for the full year as per Budget Estimates. The mop-up has been buoyant for both direct and indirect taxes. The gross monthly Goods and Services Tax collections have crossed the Rs 1 lakh crore mark consistently since July 2021, after quickly recovering from a dip in June 2021 following the second wave of Covid-19.

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“As the economy grows further, the revenue collection from all the sources is expected to be more robust, which will help to strengthen the fiscal position on one hand, and create fiscal space on the other. Thus, it is expected that reaching the budget estimate for fiscal deficit during 2021-22 will not be a concern for the Central Government,” the Survey said. The fiscal deficit for April-November 2021 has been contained at 46.2 per cent of Budget Estimates (BE) — as against 135.1 per cent of BE in April-November 2020 and 114.8 per cent of BE in April-November 2019.

Responding to the Survey’s observation that at the end of 2021-22 the economy would have recovered to the pre-pandemic level, Congress leader and former Finance Minister P Chidambaram said, “In plain language, it means that on 31.3.2022 the GDP will be at the same level as it was on 31.3.2020… The two years have impoverished people… This is a time for contrition and change (of approach), not for boasts and no change.”

The Survey noted higher capital expenditure has been central to the current year’s budget and economic recovery. “The expenditure policy of the Central government during 2021-22 has a strong emphasis on capital expenditure. Budget 2021-22 had not only enhanced the expenditure estimates but also directed them towards more productive capital expenditure. During April to November 2021, capital expenditure registered a growth of 13.5 per cent over April to November 2020 and 28 per cent over April to November 2019,” it said.

The government has budgeted a 34.5 per cent growth in capital expenditure this year over 2020-21 budget estimates, with emphasis on railways, roads, urban transport, power, telecom, textiles and affordable housing. The Survey commentary indicates the Budget for the next year could opt for milder fiscal consolidation while continuing the capital expenditure push.

Higher spending by states is another factor that is expected to support growth. “In the first eight months of the current financial year, states’ capital expenditure has gone up by 67 per cent compared with the previous financial year’s eight months. So in this uncertain pandemic era, governments have done what they are expected to do — front load growth and support it. On the back of it, it will crowd in the private sector, which will lead to job creation and employment growth,” the new Chief Economic Adviser V Anantha Nageswaran said in a press conference.

In continuation with the “barbell strategy” from previous year’s Economic Survey, this year’s survey has suggested using the “Agile” approach to use 80 high-frequency indicators “in an environment of extreme uncertainty”. The Agile approach, used in fields like project management and technology development, assesses outcomes in short iterations while constantly making incremental adjustments.

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