Renewed risks to recovery

Rising Covid cases could reverse recent gains

The provisional data for indirect tax collection in 2020-21, released by the Union government on Tuesday, suggests that the economy has been recovering at a faster than expected rate over the last few months. The indirect tax collection for the year increased by 12.3 per cent, compared to the actual collection in the previous year, including both the goods and services tax (GST) and non-GST taxes. The net indirect tax collection at Rs 10.71 trillion was 108.2 per cent of the revised estimates. The GST collection for the Central government was also about 6 per cent higher than the revised estimates, though it was about 8 per cent lower compared to the previous year’s collection.

An increase in revenue collection was supported by higher taxes on petroleum products and Customs duty. Customs duty collection registered a growth of 21 per cent despite a contraction in imports. As a result, the total tax collection was marginally higher than the previous year, despite a contraction in the direct tax mop-up. When compared with the revised estimate for 2020-21, gross tax revenue went up by 6.64 per cent. The government did well last year by increasing taxes on petroleum products, which has helped contain the damage caused by Covid-19 related disruptions. Although the government suffered on the non-tax revenue front, the final fiscal deficit number for 2020-21 could be lower than the projected 9.5 per cent of gross domestic product (GDP). The government’s relatively comfortable revenue position was also reflected by the fact that it cleared all the Food Corporation of India’s loans from the National Small Savings Fund. This is again laudable as it will help increase transparency.

However, a rapid surge in infection has increased risks. India is now reporting over 180,000 daily Covid-19 cases. Various state governments are imposing restrictions to curb the spread of the virus. Maharashtra has stopped most activities except those marked as essential. This is bound to affect overall demand and supply. If the number of new cases doesn’t start coming down quickly, other states may also contemplate similar measures. Things could get worse if restrictions are extended in the coming weeks and months. However, it’s worth noting that despite the fresh restrictions, which will affect demand, the year-on-year numbers on economic activity will look good from here on simply because of a lower base. Policymakers should not get deceived by such numbers. In fact, compared to last year, the situation could get more challenging.

The current wave is more severe than the last one and containment might take more time. Further, despite the improvement in tax collection, government finances are more stretched compared to last year. India’s public debt is estimated to have reached about 90 per cent of GDP. Even so, the government will need to extend support to the most vulnerable sections. Migrant labourers are once again leaving Indian cities. Thus, the government should be willing to increase allocation to the rural job scheme and restart the distribution of free food grains if things worsen from here on. Besides, the Reserve Bank of India would not be in a position to extend further support to businesses. The inflation rate increased to 5.5 per cent in March. Supply chain disruptions could keep the inflation rate elevated and increase constraints for monetary policy. The only viable way out is rapid scaling up of the vaccination programme. The government should work with manufacturers to increase the supply.