6 min readApr 20, 2022 08:54 AM IST
First published on: Apr 20, 2022 at 04:15 AM IST
Just as the stress created by the Covid-19 pandemic was tapering off, the Russia-Ukraine conflict has heightened geo-political uncertainty. Higher commodity prices, a consequence of this conflict, have upended projections of India’s growth, inflation and the external account balances. Accordingly, we have revised our forecasts for the ongoing financial year (2022-23), lowering our forecast for growth to 7.2 per cent, down from our earlier estimate of 8 per cent, while raising our forecast for inflation to at least 5.6 per cent, up from 5 per cent before. However, notwithstanding this deterioration in the macroeconomic environment, the central government will be able to restrict its fiscal deficit for 2021-22 (data for March will be released next month) and 2022-23 to the levels it had projected in its recent Union budget.
For 2021-22, the provisional data released by the Controller General of Accounts (CGA) indicates that the Centre’s fiscal deficit eased to Rs 13.2 trillion during the April-February period. This was due to a sharp rise in revenue receipts (30.7 per cent), accompanied by a moderate rise in revenue expenditure (10.2 per cent) and a relatively higher expansion in capital expenditure (19.7 per cent). In the weeks thereafter, the Centre’s fiscal position has only strengthened. A few days ago, the government revealed that its gross tax revenues stood at Rs 27.07 trillion in 2021-22, significantly overshooting its revised estimate of Rs 25.2 trillion.
A large portion of this upside in collections has been shared with the states. The Centre has devolved a massive Rs 2.4 trillion to the states in February, including Rs 431.7 billion towards net devolution arrears that were due to states for the period FY1997-FY2018. As per another release from the Ministry of Finance, the Centre devolved an additional Rs 950.8 billion to the states in March 2022. Accordingly, the actual tax devolution to state governments in 2021-22 stood at Rs 8.8 trillion — a considerable Rs 1.4 trillion higher than the revised estimates of Rs 7.4 trillion. In fact, even after removing the payment for past years, aggregate devolution to states overshot the revised estimates by around Rs 0.95 trillion.
These numbers also imply that the tax devolution of Rs 8.2 trillion budgeted for 2022-2023 is quite conservative. We assess the upside to the states at roughly Rs 1.1 trillion above the 2022-23 budget estimates. To put this number in perspective — this is even larger than the size of the special assistance loan for capital investment provided by the Centre to state governments. However, if the release of this additional devolution gets back-ended to the last quarter of this year, state governments may not have enough time to firm up their plans for additional capital spending. Thus, perhaps, the release of a realistic figure each month by the Centre would embolden states to speed up capital spending, boosting the fiscal impulse to the economy.
From the Centre’s point of view, even after considering the recent dividend pay-outs and prepayments by telecom operators, and the sharp shortfall in disinvestments receipts this year, we assess a net cushion of Rs 200 billion relative to the revised estimates for 2021-22 presented in the budget. Further, considering that capital spending is likely to have undershot the revised estimates, and even accounting for higher revenue expenditure, the Centre’s fiscal position in 2021-22 appears comfortable, and the deficit is unlikely to deviate meaningfully from what it had projected in the Union budget a few months ago.
The current year’s (2022-23) fiscal deficit is, however, likely to be adversely affected on account of high fertiliser and food subsidies, potential cuts in excise duty, and lower growth in direct taxes considering the likely squeeze in corporates’ profit margins. The fertiliser subsidy requirements are expected to rise and the subsidy outgo is most likely to overshoot the budget estimates of Rs 1.1 trillion by a sharp Rs. 950 billion.
Similarly, the extension of free foodgrain under the Pradhan Mantri Garib Kalyan Ann Yojana till September 2022 will cost another Rs 800 billion. While this will increase the food subsidy outgo, it will provide welcome relief to households’ food budgets. Moreover, the procurement bill for wheat may reduce meaningfully if exports are healthy.
Interestingly, the nominal GDP growth assumed in the budget is now only 9.1 per cent higher than the National Statistical Office’s second advance estimate for 2021-22. Considering this conservative assessment — we expect nominal GDP to expand by 14 per cent — this will create additional space for the government. Moreover, it will also help to moderate the size of the fiscal deficit relative to the nominal GDP this year.
On the revenue side, the government’s gross tax revenue of Rs 27.07 trillion (2021-22) is only marginally lower than the budget estimate of Rs 27.6 trillion for 2022-23. In fact, even if we assume a potential loss of Rs 920 billion on account of lower excise collections — the government could scale back excise duties on petrol and diesel to pre-pandemic levels — the net tax revenues of the Centre may end up overshooting this year’s budget estimates by a significant Rs 0.8 trillion.
Including the anticipated inflows from the LIC IPO — there are reports that the government is likely to decide on its timing soon — we expect the government’s revenue and disinvestment receipts to surpass the budget expectations by at least Rs 1.2 trillion (depending on whether excise duty is eventually reduced). This will create some fiscal space for the government, allowing it to absorb a large part of the risks related to additional spending that are evolving at the current juncture.
This column first appeared in the print edition on April 20, 2022 under the title ‘Making fiscal room’. The writer is Chief Economist, ICRA
For 2021-22, the provisional data released by the CGA indicates that the Centre's fiscal deficit eased to Rs 13.2 trillion during the April-February period. 
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