Regaining fiscal balance

GST rate restructuring will be critical for consolidation

As the Union government starts the exercise to prepare the next year’s Budget and revised estimates for the current year in October, it will be in a far more comfortable position compared to last year. The fiscal position has improved significantly and the recovery in revenue collection has surprised most analysts. By July-end, the government collected revenue worth over 37 per cent of its Budget Estimate (BE) for the current fiscal year. The comparable number in the last fiscal year was about 11 per cent. To be fair, last year was not a normal year and economic activity suffered severely because of Covid-19-related restrictions, but revenue collection till July in 2019-20, a normal year, had only reached about 20 per cent of BE. Better than expected revenue collection has also resulted in a lower fiscal deficit so far. The government is targeting to contain the fiscal deficit at 6.8 per cent of gross domestic product in the current year, compared to 9.5 per cent last year. 

The advance tax numbers suggest growth in revenue collection continues to remain strong. However, Central government finances would need careful management. As Finance Secretary T V Somanathan explained in a recent interview to The Indian Express, the government is also incurring expenditure above the BE. For instance, the government reintroduced the distribution of free food grains during the second wave, which is likely to cost about Rs 1 trillion. There is additional fertiliser subsidy outgo worth about Rs 15,000 crore, and the commerce ministry is clearing export incentive arrears worth about Rs 56,000 crore in the current year. On increasing spending to stimulate demand, Mr Somanathan rightly noted that it’s not easy to stop spending programmes in a vibrant democracy. However, in the present situation, the government can boost spending without creating permanent programmes, such as those involving cash transfers. Pushing capital expenditure, which has been lagging so far in the current fiscal year, could be one possibility. The government appears to be cautious on committing additional spending despite higher tax collection because non-tax receipts can be significantly lower than the BE. It is unlikely to meet the disinvestment target, for instance. 

Since the tax collection is likely to exceed the BE by a significant margin, the government can use the additional fiscal room to push capital expenditure. The bigger challenge for the government, however, will be to design the medium-term fiscal consolidation path. The central government will also need to take the lead in addressing the fiscal concerns of states. The end of compensation payment for goods and services tax (GST) shortfall from July next year will increase fiscal risk for many states. Since extending the compensation mechanism will not be feasible because the cess collection beyond June 2022 will be used to repay debt raised in the last and current fiscal year to pay compensation, the government needs to find other ways. The GST Council should rationalise rates as soon as possible and take them to the revenue-neutral level. This will not only improve the fiscal situation for states but also provide greater stability to central government finances and help draw the medium-term consolidation road map. Greater flexibility in government spending will help support recovery in the medium term.