Fiscal correction: Focus should be on reducing the fiscal deficit

The govt would do well to be cautious and resist the temptation of increasing expenditure in the run-up to the Lok Sabha elections because the economy is likely to slow in the second half of the year

The Union government may not be able to meet the revenue collection targets for excise and Customs duties this fiscal year. As reported by this newspaper, the shortfall under these heads could be to the tune of Rs 1 trillion, largely because of duty cuts on petroleum products and edible oil. The government may also witness a shortfall in non-tax receipts because of lower dividend by the Reserve Bank of India and sustained lacklustre performance on the disinvestment front. The government, however, is confident of meeting the fiscal deficit target for the year despite significantly higher than budgeted expenditure on food and fertiliser subsidies because of overall healthy tax collection. The data for the first half of the fiscal year, released this week, showed that the fiscal deficit was at 37.3 per cent of the Budget estimate, which was marginally higher than the 35 per cent witnessed during the same period last year.

 
Although net tax collection in the first half was at 52.3 per cent of the Budget estimates compared to 59.6 per cent last fiscal year, economists expect the final number to significantly exceed the Budget estimates. The government has in fact reduced the borrowing target for the year by Rs 10,000 crore. It is targeting to contain the fiscal deficit at 6.4 per cent of gross domestic product in the current year. However, the government would do well to be cautious because the economy is likely to slow in the second half of the year. Early corporate results for the September quarter indicate a slowdown in earnings growth, which would affect tax collection. While the government may be able to meet the target for the current year, it would need a medium-term road map. It has been reported that policymakers are considering giving up the conservative approach to revenue estimates for the next Budget. Since expenditure often tends to exceed Budget estimates, more optimistic projections could end up increasing fiscal pressures. As the fiscal deficit is likely to remain elevated in the medium term, the focus should be to bring it down to more reasonable levels as soon as possible. In this context, the government will have to resist the temptation of increasing expenditure in the run-up to the Lok Sabha elections, before which the Budget to be presented in February 2023 will be the last full one.

 
Besides bringing down the fiscal deficit to reasonable levels, the government would do well to make some important corrections. The states’ share in central taxes has been running low compared to the Finance Commission’s recommendation, largely because of the Centre’s dependence on cesses and surcharges. The share of cesses and surcharges in the Union’s taxes has gone up from about 6 per cent in 2014-15 to over 20 per cent now. Since these are not shareable, the overall devolution has come down. This needs to be corrected because it is not only unfair to the states but can also create a fiscal imbalance. Further, while it is not fully in its control, the Centre can take the lead in rationalising rates for goods and services tax (GST). It is now well known that the GST system has not performed as desired, partly because of premature rate reduction, which needs to be corrected. This is essential for both the Centre and the states because it would help create the fiscal space to push growth-enhancing expenditure.