Fiscal deficit likely to stay at budget estimate of 6.8% of GDP in 2021-22

Tax revenues may not narrow deficit; food, fertiliser subsidies to overshoot BE

The fiscal deficit is likely to stay at the budget estimate (BE) of 6.8 per cent of gross domestic product (GDP) in 2021-22, according to a senior official, because tax collection, however robust, may not be able to narrow the gap.
 
The fiscal deficit estimated by the Budget is Rs 15.07 trillion.
 
The official said the target would not see any reset in the revised estimates because the Centre is likely to overshoot its expenditure on subsidies, mainly on food and fertilisers.
 
The increase is expected primarily due to an extension of the free food grain distribution scheme till November and high global prices of raw materials and finished products of fertilisers, which have necessitated two rounds of subsidy support so far during FY22 over and above the BE.
 
However, economists see the fiscal deficit lowered by at least half a percentage point than initially targeted.
 
Soumya Kanti Ghosh, group chief economic advisor, State Bank of India, said: “The Centre’s fiscal deficit, which showed compression during the April-August period, is expected to be lower than the budgeted target and could be in range of 6.2-6.3 per cent of GDP, assuming that the government meets its disinvestment target and holds on to the likely more than budgeted collection from excise duties on fuel.”
 
“The Centre’s gross tax revenues (before refunds) in the first quarter of FY22 relative to the pre-Covid level have showed that the momentum will continue even in the second half. We expect the government’s gross tax revenues to exceed the FY22 BE by at least Rs 2.5 trillion,” he said.
 
Aditi Nayar, chief economist at ICRA, said the fiscal deficit in FY22 was likely to be Rs 13.8-14.8 trillion. Disinvestment will determine how much it will reduce.
 
The Centre’s fiscal deficit in proportion to the BE fell to an 18-year low of 31.1 per cent in the first five months of FY22. The BE of FY22 had estimated the food subsidy at Rs 2.43 trillion, which was 42.54 per cent lower than the revised estimate of FY21. The cut was on account of extra provisioning done last year to clear the pending dues to the National Small Savings Fund (NSSF) over the last few years to adjust for the extra subsidy required by the Food Corporation of India (FCI).
 

However, the Centre has re-launched the free food grains distribution programme — Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY) — initially for May and June, but was later extended till November. This has meant an additional expenditure of Rs 67,266.44 crore. This, along with the Rs 26,602 crore extra spending on the scheme for May and June, means an extra expenditure of Rs 93,868 crore on free food this fiscal year.
 
Similarly, the BE for the fertiliser subsidy in FY22 was Rs 79,529 crore, which was 40.6 per cent less than the revised estimate of FY21 because, just like in food, extra provisioning was done in the previous fiscal year to clear the pending dues and subsidy carry-overs.
 
However, during the year so far, the Centre has to provide an additional subsidy of Rs 14,755 crore in June for di-ammonia phosphate (DAP) because the prices of the raw materials required to make it and the finished products in the global markets soared due to the supply crunch.
 
The country produces around 50 per cent of the annual consumption of DAP, while the rest is imported. Prices of the raw material for DAP — phosphoric acid and ammonia — have gone up in global markets since January 2021.
 
Besides, in early October, the Centre had hiked the subsidy for non-urea fertilisers because prices continued to remain high. It also extended the subsidy rates for other constituents of fertilisers till March 2022.
 
ICRA has estimated around Rs 1.22 trillion will be required to manage the fertiliser subsidy, which will be around Rs 42,000 crore more than the BE of FY22. Of this, some sources said around Rs 1.12 trillion had been provided through announcements over the past six months or more.
 
However, revenues from taxes recorded sharp growth during the first half of the fiscal year. Collection from direct taxes, before adjusting for refunds, grew 47 per cent to Rs 6.46 trillion till September of FY22 against Rs 4.39 trillion during the same period of the previous year, the government data showed.
 
In calculating the fiscal deficit, tax collection after refunds is taken into account. Called net tax collection, it rose 74.4 per cent at Rs 5.70 trillion till September against Rs 3.27 trillion a year ago. Collection rose 27 per cent over Rs 4.49 trillion during the same period of FY20.