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Understanding post-second wave fiscal trends

Aditi Nayar writes: Formalisation of economy expands tax base, boosts Centre’s coffers, but states might suffer with discontinuation of GST compensation.

So far, the fiscal costs of the expenditure announcements made by the Centre after the 2021-22 budget have been quite modest.

As India emerges from the crisis brought about by the second wave of the Covid-19 pandemic, an upturn in government revenues is underway, improving its fiscal position. ICRA’s estimates suggest that the general government (Centre and states) fiscal deficit will narrow this year, led by a correction at the Union government level. While our study of 12 large states suggests that their fiscal deficit will remain largely stable, the quality of the deficit is set to improve with a pickup in capital spending.

Let’s first examine the trends for the Government of India. Its fiscal deficit shrank to Rs 5.3 trillion in April-September 2021-22, down from Rs 9.1 trillion a year ago. This was an outcome of a commendable, if partly base-led, doubling of revenue receipts amidst a 10 per cent rise in total expenditure.

A separate press release had indicated that the Centre’s gross direct tax collections in the first half this year recorded a robust growth of 47 per cent growth (year-on-year) and 17 per cent relative to the pre-Covid period. Headline GST collections have also increased by 50 per cent (year-on-year) in the first half, while excise duty collections continue to benefit from the higher cesses imposed on petrol and diesel last year when crude oil prices had crashed.

With this broad-based improvement in tax revenues in the first half, and growing confidence that rising vaccinations will boost consumer confidence and spending in the second half, the Centre’s tax revenues are expected to remain robust. We expect them to exceed the budget estimate (BE) by at least Rs 2 trillion. Of this, roughly Rs 1.4 trillion will be retained by the Union government, while Rs 600 billion will be shared with the states, adding to their resource pool.

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There are other sources that will boost the Centre’s revenues this year. For one, the transfer of surplus by the RBI is around Rs 500 billion higher than what was budgeted for. Moreover, we expect modest inflows to commence from the National Monetisation Pipeline.

However, following the package announced for the telecom sector, we assess the inflows from this sector into non-tax revenues to be limited to Rs 280 billion, trailing the budgeted target of Rs 540 billion. On balance, we expect the Centre’s revenue receipts (net of devolution to states) to exceed the budget target by a considerable Rs 1.9 trillion.

After the muted rise in spending seen till August, all ministries were permitted to spend as per their own approved budget for the year. We anticipate that spending will gather pace in the second half of this year, which will enhance confidence and act as a booster shot for economic activity.


So far, the fiscal costs of the expenditure announcements made by the Centre after the 2021-22 budget have been quite modest. For instance, the net outgo related to the first supplementary demand for grants stood at Rs 237 billion. Recently, an expected enhancement has been made in the outlay for fertiliser subsidies for the rabi season. Moreover, we suspect that allocation for MGNREGA may need an enhancement of Rs 150-250 billion. Overall, we expect the total expenditure to exceed the budgeted levels, but by a relatively moderate Rs 600-800 billion.

Accordingly, the Centre’s fiscal deficit is likely to be lower than budgeted, the extent of which will be driven by the size of the disinvestment inflows that are eventually realised. We expect the deficit to print at Rs 13.8-14.8 trillion (6.0-6.5 per cent of GDP), as compared to the budgeted Rs 15.1 trillion.

On the state governments’ side, we have undertaken detailed projections for a sample of 12 large state governments, which account for three-fourths of India’s GDP. (These states are Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal.) Eight of the 12 state governments had presented their 2021-22 budgets prior to the second wave of the pandemic. Their revenue receipts were budgeted to expand by a robust 33.3 per cent, exceeding the 20.7 per cent growth in their revenue expenditure. With capital and net lending expected to soar by 59.2 per cent, the fiscal deficit was budgeted to remain nearly unchanged.


ICRA forecasts the combined revenue receipts, revenue expenditure and capital spending of these states to trail their budgeted projections. Based on this, we project their combined fiscal deficit (in absolute terms) at practically the 2020-21 provisional levels — though as a percentage of GDP, it will decline. Moreover, the quality of the deficit will improve with states allocating more resources for capital expenditure.

Overall, the general government (Centre and states) fiscal deficit is expected to correct to under 10 per cent of GDP in 2021-22 from around 13 per cent in 2020-21, remaining well above what was seen in previous years. The revenue upturn that is being witnessed will need to sustain to consolidate the fiscal position further, while ensuring more space for growth-boosting capital spending.

For the Government of India, the underlying formalisation of the economy should support a continued expansion of the direct tax base, and aid this process. However, the discontinuation of the GST compensation, which is looming on the horizon, poses a structural challenge for the states, and may prevent their fiscal deficit from consolidating back to the pre-Covid level anytime soon.

This column first appeared in the print edition on November 4, 2021 under the title ‘Revenue gains, silver lining’. The writer is Chief Economist, ICRA.

First published on: 04-11-2021 at 02:04:24 am
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