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Tuesday, December 07, 2021

Improved finances gives Centre leeway to slash fuel excise duties, but a renewed spending spree is avoidable

With most central banks signalling their intent to suck out excess liquidity in response to inflation concerns, the pressure on yields may only go up.

By: Editorial |
Updated: November 2, 2021 9:43:33 am
Not only has the pandemic had very little impact on revenue collections this fiscal, the Centre is in a position where it can actually spend in the second half.

The Centre’s gross tax revenues have grown 64.2 per cent year-on-year during April-September. With net tax as well as non-tax revenue receipts up 96.3 per cent and total expenditures rising only 9.9 per cent, the fiscal deficit of Rs 526,851 crore for the first half of 2021-22 is just 35 per cent of the budget estimate for the whole year. That ratio, according to the Swiss investment bank Credit Suisse, is the lowest since 2007-08 and way below the 10-year-average of 74 per cent. Simply put, government finances — at least the Centre’s — are much better than projected in the budget that was presented before the second wave of Covid. Thus, not only has the pandemic had very little impact on revenue collections this fiscal, the Centre is in a position where it can actually spend in the second half. This is unlike previous years, when the finance ministry would force arbitrary last-quarter expenditure cuts by all departments in order to meet fiscal deficit targets.

There are two probable reasons for the above turnaround; the fact that gross tax revenues are up 28.7 per cent even over April-September 2019 suggests it isn’t just due to last year’s low base. The first has to do with the increasing formalisation of the economy. Demonetisation, GST (goods and services tax) and the lockdown have led to organised sector firms gaining market share from informal enterprises. That, along with e-way bills and other systems now for tracking transactions and plugging leakages, has translated into overall improved tax compliance. This again is borne out by corporation and income tax collections during April-September 2021 being 23.8 per cent and 28.7 per cent higher than their corresponding respective levels for April-September 2019. The second factor has been petrol and diesel taxes. The Centre’s revenues from excise duties (mainly on fuels), at Rs 171,684 crore during April-September, have grown 79 per cent over the Rs 95,930 crore for the same period two years ago.

What should be the way forward? The Centre should, for starters, consolidate its fiscal gains. That is important in the current scenario where yields on its 10-year bonds have already hardened to nearly 6.4 per cent, from the sub-6 per cent levels till early June. With most central banks signalling their intent to suck out excess liquidity in response to inflation concerns, the pressure on yields may only go up. The Indian economy needs no demand stimulus today, but cannot also afford interest rate hikes derailing an ongoing recovery. Improved finances gives the Centre enough leeway to slash fuel excise duties (necessary to curb inflation expectations) and clear GST compensation dues to states (which it has already done). But a renewed spending spree is something wholly avoidable.

This editorial first appeared in the print edition on November 2, 2021 under the title ‘Fiscal cushion’.

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