A slowing economy has taken a grave toll on government finances. At the aggregate level, the Centre’s gross tax revenues have grown by a mere 0.81 per cent in the first eight months (April to November) of the current financial year. In comparison, the budget had pegged revenue growth at 18.3 per cent this year. With revenues falling well short of expectations, the Centre may have to cut back on spending in order to meet the fiscal deficit target. Considering that higher government spending has propped up the economy so far, any cuts in spending will aggravate the slowdown. Lower capital spending will also have implications for the plans for the infrastructure pipeline unveiled by the finance minister recently.
A closer look at government finances suggests stress on both tax and non-tax revenues. On the direct tax side, though the full impact of the reduction in the corporate tax rate on revenues is not immediately clear, corporate tax collections have contracted by 0.91 per cent over the same period, as against a target of 15.4 per cent. Personal income tax collections have fared marginally better. On the indirect tax side, if Integrated GST collections in December are equally split, then Central GST collections at the end of December would stand at Rs 3.72 lakh crore, compared to the full year target of Rs 5.26 lakh crore. This implies that CGST collections, including IGST, will need to average Rs 51,207 crore per month in the current quarter to meet the target, as opposed to the current average monthly collection of Rs 41,375 crore. Then there is also concern over meeting this year’s disinvestment target. As against a target of Rs 1.05 lakh crore, collections so far have been only Rs 17,364 crore. It was hoped that the sale of BPCL would help meet the target but it is unlikely to materialise soon. In such a situation, it is difficult to see how the Centre can meet its revenue targets this year. But, it’s not just the Centre. State governments are also facing difficulties with revenue growth slowing down sharply. And as, put together, spending by states far outstrips that by the Centre, cutbacks in state spending will have serious implications. Though it is possible that both the Centre and the states deviate from the fiscal road-map, borrow more to finance their spending, higher borrowing could push up bond yields, negating the impact of monetary easing.
Finance Minister Nirmala Sitharaman’s maiden budget was criticised for not presenting an accurate picture of government finances. The upcoming budget is an opportune moment for the government to come clean, present an accurate picture. This could then form the basis for drafting a new, realistic fiscal road-map.
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