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Why the Indian government should resist the temptation to increase spending

With tax collections exceeding expectations, the government has an opportunity for fiscal consolidation.

GDP growth, Indian economy, CAG Controller General of Accounts, Tarun Bajaj, GST collections, CGA data, Indian express, Opinion, Editorial, Current AffairsOn the expenditure side, the Union government is facing a massive increase in its subsidy bill. Actual spending on the food and fertiliser subsidy and also on LPG will be significantly higher than what has been budgeted for.

Notwithstanding the likely slowdown in economic momentum in the second half of the year, the Union government’s tax collections are on track to surpass its budgeted target by a significant amount this year. Data released by the Controller General of Accounts last week shows that gross tax collections have already touched 58 per cent of the full year’s target, growing by 18 per cent in the first seven months (April-October) of the current financial year. In comparison, the budget had pegged collections this year to grow by just under 2 per cent. As per recent statements by revenue secretary Tarun Bajaj, the government is now hopeful of exceeding the budgeted target by nearly Rs 4 lakh crore. With its spending also likely to surpass earlier expectations by a considerable margin, higher tax collections will provide some comfort to the government’s fiscal arithmetic.

Under the broad rubric of taxes, direct tax collections have grown by a robust 26 per cent in the first seven months of the financial year, with healthy growth being seen across both corporate and income tax collections. While the pace of direct collections has eased during July-October when compared to the first quarter, it continues to be higher than nominal GDP growth in the second quarter. On the indirect tax side, GST collections continued to witness healthy growth, recording an increase of 11 per cent in November. Higher tax collections at the level of the central government imply that devolution to states will be higher than the budgeted amount of Rs 8.16 lakh crore. Data from CGA shows that till October, the Centre had transferred Rs 4.34 lakh crore to states. Another Rs 1.16 lakh crore was transferred in November as per a recent press release. The months of August and November have in fact witnessed double installments as the Centre has stepped up devolution. Along with the interest free loan scheme extended by the Centre, higher devolution implies that states have considerable fiscal room to increase capital expenditure. However, this has not been the case so far. Capex by states has been rather muted. Considering that the central government has maintained the momentum on its capital spending, growing by around 60 per cent in the first seven months of the year, the overall general government fiscal impulse will depend on how effectively states are able to utilise the extra space available to them.

On the expenditure side, the Union government is facing a massive increase in its subsidy bill. Actual spending on the food and fertiliser subsidy and also on LPG will be significantly higher than what has been budgeted for. This is likely to make the fiscal situation challenging. Calls for increasing spending to support the economy during this uncertain period will only gain traction as the budget approaches. The government must however resist the temptation. It should stick to the glide path of fiscal consolidation.

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First published on: 05-12-2022 at 06:30 IST
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