Borrow to spend

At the aggregate level, the Centre’s gross tax collections during this five-month period contracted by 23.7 per cent over the same period last year, reflecting the economic hit from the pandemic. However, the pace of contraction has eased in each subsequent month, and tax collections grew by 2 per cent in August. This uptick was driven largely by higher excise collections, and a favourable base effect owing to the settlement of the integrated GST (IGST). On the other hand, non-tax collections and disinvestment proceeds continue to remain depressed. The Centre’s non-tax revenues stood at Rs 86,146 crore during this period, or 22 per cent of the budgeted target, as compared to 63 per cent last year. Slippages on account of dividends and proceeds from the telecom sector will have a bearing on its ability to meet the target this year. Similarly, the Centre’s ability to meet the Rs 2.1 lakh crore disinvestment target for the year is also questionable. Equally worrying is the second straight month of decline in central government capital expenditure, and the slowing pace of its revenue expenditure.

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Leading indicators suggest a continued pick up in economic activity, despite COVID infections spreading. On the production side, the Nikkei’s Manufacturing Purchasing Managers’ Index expanded at the fastest pace in eight years in September, while on the consumption side, GST collections in September stood at Rs 95,480 crore, up 4 per cent over last year. However, despite this, the shortfall in the Centre’s overall revenue measured against its budgeted expectations and its expenditure priorities suggest that even the additional borrowings it has planned for — the Centre had raised its borrowing from Rs 7.8 lakh crore to Rs 12 lakh crore — may not be enough. Given the continuing uncertainty over the pandemic, continuing stress on its revenues, and demand for greater support than what has been provided so far, the Centre may well need to borrow more in order to finance its spending.