Tax revenue boost or expenditure cuts can help meet fiscal deficit target

With not even the first two months of FY23 over, it is becoming increasingly clear that unless there is a massive boost in tax revenue or major cuts in expenditure, the fiscal deficit target of 6.4 per cent of the GDP is unlikely to be met.

The impact of Saturday’s excise duty cuts will be Rs 1 trillion for a year, Finance Minister Nirmala Sitharaman had said. Senior officials told Business Standard that with one and a half months already gone in the current fiscal year, the impact will be about Rs 85,000 crore.

Sitharaman tweeted on Monday that the Centre will bear the entire revenue foregone as a result of the cuts. “Basic excise duty (BED), special additional excise duty (SAED), road & infrastructure cess (RIC) and agriculture & infrastructure development cess (AIDC) together constitute excise duty on petrol and diesel. Basic ED is sharable with states. SAED, RIC & AIDC are non-sharable,” Sitharaman said.

“The excise duty reduction of Rs 8/litre on petrol and Rs 6/litre on diesel (effective from Sunday) has entirely been made in RIC,” Sitharaman said, adding that the earlier cut by the Centre in November, of Rs 5 per litre on petrol and Rs 10 per litre on diesel, was also in RIC.

“Basic ED, which is sharable with states, has not been touched. Therefore, the entire burden of these two duty cuts is borne by the Centre,” she said.

Apart from the excise duty cuts, Sitharaman also said the Centre will bear an additional Rs 1.1 trillion in fertiliser subsidy burden as commodity prices have spiked due to Russia’s invasion of Ukraine.
 

Additionally, the decision to provide a subsidy of Rs 200 per gas cylinder (up to 12 cylinders) to over 90 million beneficiaries of Pradhan Mantri Ujjwala Yojana, will lead to revenue foregone of Rs 6,100 crore a year for the exchequer.

Add to this, the Modi government’s decision to extend the PM Garib Kalyan Anna Yojana (PMGKAY) till September, which will increase the food subsidy outlay for FY23 to Rs 2.87 trillion from Budget estimate of Rs 2.07 trillion.

Provided all other assumptions remain the same, all these hits on revenue and expenditure might widen the fiscal deficit budget estimate for the year to Rs 19.42 trillion from a budgeted Rs 16.6 trillion. As a percentage of nominal gross domestic product, this will be 7.5 per cent of GDP compared with the budgeted 6.4 per cent. So, what the government needs are bumper goods and services tax, income tax and corporate tax collections.

Analysts said this might be possible. “The fiscal cost, while material, can be absorbed by higher-than-budgeted revenues through other taxes. We estimate the tax revenues of the Centre to surpass the Budget estimates by at least Rs 1.3 trillion even after the excise reduction,” said Aditi Nayar, chief economist with ICRA Ltd.

On the expenditure front, the Centre has been categorical that there will be no compromise on the Rs 7.5 trillion, as public investment in infrastructure remains the plank on which the Modi government is betting India’s economic revival. There is unlikely to be major cutting of expenditure on flagship welfare schemes as well.

However, as reported earlier, the finance ministry has asked the various line ministries and entities responsible for implementing subsidy and welfare schemes to cut wasteful expenditure on an expedited basis.

On the food subsidy front, Food Corporation of India (FCI) and the Food and Public Distribution department have been asked to weed out efficiencies up and down the value chain.

Similarly, in flagship schemes such as National Rural Employment Guarantee (NREGA) and PM-Kisan, the relevant ministries have been told to speed up identifying ghost beneficiaries, fake accounts, etc. Of particular concern to central policymakers is the fact that the number of NREGA beneficiaries was about 50 million before the pandemic, rose to about 70 million as the economy slumped, but has not come down to pre-pandemic levels.