Opinion On fiscal consolidation, so far, so good

Corporation tax collections now need to rise by just around 5 per cent in the second half, while income tax collections can even contract by upto 3 per cent to meet the full year target. However, assuming that direct taxes do grow by 10 per cent in the second half, collections will exceed the expectations by a sizeable Rs 0.85 trillion. ICRA also expects the central GST inflows to mildly overshoot the budgeted target. Though, union excise duty collections will continue to trail the target.

Thus, there seems to be an upside in gross tax revenues of around Rs. 0.5 trillion, 42 per cent of which will be devolved to states. This leaves an additional Rs 0.3 trillion with the Centre. However, this will be offset by an almost equivalent shortfall in disinvestment proceeds.

On the expenditure side, as against a 7.5 per cent growth target, the Centre’s total spending grew by a sharp 16.2 per cent in the first half. Moreover, recent announcements do signal that a number of allocations need to be enhanced in the supplementary demand for grants.
First, after considering the additional economic cost towards the extension of free foodgrains under the NFSA for January-March 2024 (which is part of the extension announced for five years), ICRA estimates the food subsidy outgo to exceed the budget allocation by Rs 300-400 billion.

Second, the government has raised the subsidy on LPG by Rs 100/cylinder. This is likely to warrant an additional Rs 95 billion this year. Further, in October, the Cabinet approved the Nutrient Based Subsidy rates on P&K fertilisers for the ongoing rabi season. Thus we estimate the total fertiliser subsidy requirement to overshoot the budget allocation by Rs 150-200 billion.

Third, the amount spent on NREGA so far already exceeds the budgetary allocation. ICRA estimates that an additional allocation of Rs 250-300 billion may be required. Together this translates to an additional spending of Rs 0.8-1.0 trillion. However, this sum could be matched by expenditure savings, which have ranged between an estimated Rs 1.1-2.3 trillion in recent years.

On the capex front, considering current trends, capital spending needs to grow by 30 per cent in the second half to meet the full-year target. But, we are apprehensive that the momentum of capex may slow down prior to the general elections which could result in the target for the year being missed. Notably, this could help absorb a part of the aforesaid overshooting of expenditure.

So are there any fiscal risks looming on the horizon? If any new schemes are announced now in the run up to the parliamentary elections then the actual outgo would only happen once they become fully operational. Thus the impact on the total expenditure this year is not expected to be material on this account. And once the model code of conduct is announced, new schemes or a significant change in entitlements under existing schemes may anyway not be possible.

This suggests that the key risk at this point is from an enhancement in entitlements under existing schemes, the possibility of which appears low. Regardless, with just about four months left in the year, the fiscal impact of any such announcement would be limited.

Looking beyond, consolidating the government’s fiscal deficit from 5.9 per cent to 4.5 per cent of the GDP in two years entails either a concerted compression of the revenue deficit or bringing down the capex growth from the levels budgeted for the last two years. To avoid the latter, pre-poll promises that structurally inflate the revenue deficit should be resisted.

The writer is Chief Economist, Head- Research & Outreach, ICRA