A three-pronged Strategy

Context:  There are more challenges in making Budget for 2021-22 than in the previous two budget-making.

Challenges for the 2021-22 Budget

• Low revenues and expenditure: The revenue projections in the last two Budgets have been low (in 2019- 20) was over 14% less than what was initially projected in the Budget Estimate.
• Reducing fiscal deficit: An improved economic situation will raise expectations of a clear articulation of a road map for fiscal consolidation after the huge slippage that 2020-21 would experience.
• Tackling low buoyancy of taxes: The buoyancy factor measures the incremental rise in tax collection in relation to growth in the economy.
  • The buoyancy factor for the Centre’s gross tax collection fell to 1.54 in 2016-17, 1.05 in 2017-18, 0.77 in 2018-19, and -0.5 in 2019-20. (below one represents tax rising slower than growth.)
• Low non-tax revenues: Since 2010-11, the non-tax revenues remained below 2% of Gross domestic product (GDP).
• This is due to over-dependence on a few sectors for revenue generation like telecom spectrum fees (34%), the Reserve Bank of India (40%), public sector enterprises and banks.

Ways to manage these challenges

• Managing the challenge of expectation:
• Revenue estimates to be based on a realistic and credible assessment of the state of the economy.
• A credible trajectory of a reduction in the fiscal deficit: can be done through synchronising the deficit reduction road map with the pace at which revenues are projected to increase.
• Increase tax revenue: Study the factors that led to a decline in tax buoyancy and make amendments.
• Increase non-tax revenue:
• Increase the fees of government services: E.g. Increase the fees of civil service exams, which is currently only Rs 100.
• Raise more fees: from operators of direct-to-home television service providers.

Conclusion: Government should lay out a credible fiscal consolidation plan, reverse tax buoyancy decline, and boost non-tax revenues to augment the government’s revenues.