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Tuesday, October 26, 2021

Tax collections have been robust so far. Meeting disinvestment and non-tax revenue targets could provide additional fiscal space

Healthy collections will create the fiscal space for the government to ramp up spending, to provide support to the economy during the second half of the year

By: Editorial |
Updated: October 4, 2021 9:45:17 am
High tax collections notwithstanding, the fiscal math is not that straightforward.

Data released by the Controller General of Accounts points towards a sustained improvement in central government finances. At the end of the first five months (April-August) of the current financial year, the Centre’s gross tax collections touched almost 40 per cent of the budgeted target — this is far in excess of what has been the trend so far. However, government spending has been restrained so far. The situation is likely to change in the second half of the year with the lifting of restrictions imposed on spending by various ministries.

On the revenue side, while both direct and indirect tax collections have witnessed robust growth, indirect tax collections continue to account for a larger share of total tax collections, as revenue through GST, customs and excise continues to register healthy growth. However, there is cause for concern. For one, disinvestment proceeds continue to lag. As against a target of Rs 1.75 lakh crore, collections so far are a mere Rs 8,369 crore. The sale of Air India, and successful fructification of other big ticket items such as BPCL, the listing of LIC, could boost government coffers dramatically. Two, the government’s recent moves to provide relief to the telecom sector are likely to have an adverse effect. Giving telecom operators a moratorium on their dues, while in the financial interest of the sector, will affect the government’s non-tax revenues. Inflows are likely to be much lower than the Rs 54,000 crore the government had hoped to garner from other communication services. On the expenditure side, at the end of the first five months, central government spending remained relatively muted — spending was only two per cent higher than last year. In fact, non-interest revenue expenditure was only 0.8 per cent higher than in 2019-20. Encouragingly, however, in August, government spending was up around 40 per cent, driven by both revenue and capital expenditure.

High tax collections notwithstanding, the fiscal math is not that straightforward. First, the distribution of free foodgrain for eight months is likely to cost around Rs 1 lakh crore. Second, an additional Rs 15,000 crore is to be spent on the fertiliser subsidy. And third, arrears of Rs 56,000 crore of export incentives have to be cleared. However, the government’s borrowing programme for the second half of the year suggests that it expects the fiscal deficit to be lower than the budgeted amount — an indication of its comfort with revenue collections in the second half of the year. Much will depend on disinvestment and non-tax revenues. Healthy collections will create the fiscal space for the government to ramp up spending, to provide support to the economy during the second half of the year.

This editorial first appeared in the print edition on October 2, 2021 under the title ‘Gaining momentum’.

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