States surge ahead

While the Centre's tax revenue growth has decelerated, the states have put up a better performance

Celebrations over continued robust growth in the Union government’s tax collections have understandably died down. Importantly, such a mood change has coincided with the emergence of quite a few puzzling trends in tax collections, which perhaps indicate the likely trajectory of government finances during the remaining quarters of the current financial year. In contrast, however, the states are showing continued buoyancy in their tax revenues, and their expenditure mix also seems to have got better.

But let us first assess the sharp decline in the Union government’s tax growth rate. After the heady days of the Centre’s gross tax collections growing by about 34 per cent in 2021-22, the highest seen in the last three decades, and their share in gross domestic product (GDP) reaching a record level of 11.54 per cent, there is now a deceleration that cannot be missed. In 2022-23, gross tax collections grew by about 13 per cent and their share in GDP declined to 11.23 per cent.

The decelerating trend continues even in the current year. The annual target for gross tax collections growth for 2023-24 was kept in the Budget at about 10 per cent, but the latest number for the first quarter of the current year puts the actual growth at just about 3 per cent. While the goods and services tax (GST) continues to grow in double digits (about 11 per cent in the first quarter, although down from 34 per cent in the same period a year ago), corporation tax collections in the April-June 2023-24 fell by 14 per cent, and excise too fell by 15 per cent.

While the fall in excise collections is understandable in view of the softening crude oil prices, the decline in corporation tax collections is disconcerting as it comes during a period when a sample of about 1,000 listed companies reported a 65 per cent increase in their net profit. What does it say about India Inc’s profit forecast and its corporation tax contributions to the exchequer in the remaining quarters of the year? Or are these a reflection of more investments made by them and the rise of new manufacturing companies, which enjoy tax concessions and a lower tax rate, respectively?

Personal income tax collections during the first quarter of 2023-24 grew by 11 per cent, but this too meant a sharp deceleration from 41 per cent seen in the April-June period of 2022-23. But in a surprising development, Customs collections rose by a whopping 35 per cent in April-June 2023, compared to a drop of 12 per cent in the same period in 2022. This increase, in the normal course, should have also meant a corresponding rise in collections of GST on imports. But GST collections on imports during April-June 2023 grew by just 2 per cent, compared to a 25 per cent rise in the same period of 2022. This is yet another puzzle.

On the expenditure side, the quality of the Centre’s overall spending pattern saw a significant improvement. As projected in the Budget, the government’s revenue expenditure in the first quarter of 2023-24 was almost flat, rising by 0.09 per cent only. In contrast, its capital expenditure rose by 59 per cent. Remember that the Budget has projected an annual increase of 1.4 per cent for revenue expenditure and a much higher increase of 36 per cent for capital expenditure. Clearly, the Centre has done much better by reining in its revenue expenditure and exceeding its capital expenditure target by a good margin.

With tax collections rising at less than the optimum rate of 10 per cent and expenditure growth exceeding the budgeted target, there will be serious questions about the government’s ability to stay within the fiscal deficit target of 5.9 per cent of GDP in 2023-24. The additional dividend and surplus bonanza from public-sector enterprises, state-owned banks and the Reserve Bank of India will most likely be neutralised by the shortfall in its disinvestment receipts. With the likely pressure on the government to spend more in the coming months in view of the forthcoming elections, the Union finance ministry will have its hands full to meet its deficit target this year. Any failure to meet that target this year would not augur well for the country’s public finances.

But no assessment of the country’s public finances can be complete without simultaneously evaluating the revenue and expenditure situation prevailing in the states. Official data for the first quarter of 2023-24 are available only for 22 states, which roughly account for 92 per cent of the total Budget size of all the states and Union Territories in the country. On the expenditure side, these states broadly mirror the trend seen at the Centre. Their revenue expenditure in the first quarter of 2023-24 has grown by only 7 per cent, while their capital expenditure has jumped by 75 per cent.

While reining in revenue expenditure is a creditable performance, the increase in capital expenditure is a relief, coming as it does after a sharp decline in the growth rate in 2022-23 to just about 12 per cent. Most likely, the Central support to the states for their capital expenditure has helped and its overall positive impact on the economy can hardly be ignored. Sustaining the capital expenditure growth by the states in the coming months will be as important as keeping a check on their revenue expenditure, if the states’ overall fiscal deficit needs to be kept within the target of 3.5 per cent of GDP.

The states’ tax revenue collections in the first quarter of 2023-24, however, present a better picture than that of the Centre. Against the Centre’s tax collections growth of 3 per cent, the states have clocked a tax revenue growth rate of 22 per cent. Of course, this growth has been propped up by a generous increase in the sharing of Union taxes — by 59 per cent. This increase could be a result of the Centre’s generosity in proactively releasing the taxes to be shared with the states. But even without such support from Central taxes, the states’ own tax revenues grew by 12 per cent. This is highly reassuring. If the states can get their act together in mopping up more tax revenues and record a growth rate that is much higher than that of the Centre, the story of India’s public finances would read much better and more promising. If only some of them eschewed the fiscally problematic ideas like restoring the old pension scheme, their economic journey could become even smoother.