In the Mid-Year Economic Analysis for 2014-15, the advisors conceded the Budget for 2014-15 overestimated tax collection by Rs 1.05 lakh crore due to wrong projections of nominal economic growth and tax buoyancy. “This experience should inform the forthcoming budget,” said the analysis, penned by Chief Economic Adviser Arvind Subramanian and his team.
This may seem to have only economic repercussions, however, its political effects cannot be ruled out because Finance Minister Arun Jaitley had said in Parliament in the previous session that he had taken the fiscal deficit numbers from the interim Budget presented by his predecessor P Chidambaram.
Jaitley had also estimated the Centre’s fiscal deficit at 4.1 per cent of the gross domestic product, the number provided in the interim Budget presented by Chidambaram.
Former Finance and Economic Affairs Secretary Arvind Mayaram, who was the key figure in preparing the interim budget and the full Budget for 2014-15, was shifted first to the tourism ministry and then to the minority affairs ministry in October.
While a sum of Rs 27,079 crore was miscalculated due to exaggerated projections of nominal economic growth, Rs 78,005 crore was wrongly projected on tax buoyancy, said the analysis. This was roughly the shortfall in tax collections, it added.
The advisors said nominal economic growth would be about 10.6 per cent instead of the 13.4 per cent assumed in the Budget. The nominal growth is likely to be hit by a moderation in inflation and lower real economic growth.
Though real economic growth is pegged at 5.5 per cent for the year, it is at the lower end of projections made in the Economic Survey of 5.4-5.9 per cent.
Then, the government overestimated the buoyancy of tax revenue. Buoyancy refers to growth in tax collection relative to nominal GDP.
While the overestimation was Rs 68,976 crore in indirect taxes, it was Rs 36,108 crore in direct taxes. Services tax was overestimated by Rs 32,287 crore, excise duty by Rs 23,455 crore, personal income tax by Rs 16,075 crore, corporate tax by Rs 9,539 crore and customs duty by Rs 15,664 crore.
Although the Budget presented by Jaitley retained the fiscal deficit at 4.1 per cent of GDP, there were minor variations within various heads. Corporate income tax was estimated to yield the same amount at Rs 4.51 lakh crore, but personal income tax was pegged Rs 22,000 crore lower at Rs 2.84 lakh crore because of various reliefs announced. In indirect taxes, there were minor alterations.
On the expenditure side, plan expenditure was placed Rs 19,000 crore higher at Rs 5.75 lakh crore and non-plan expenditure Rs 12,000 crore less at Rs 12.19 lakh crore.