Fiscal Cushion

Newspaper Rainbow Series     2nd November 2021     Save    
QEP Pocket Notes

Context: Improved finances gives Centre leeway to slash fuel excise duties, but a renewed spending spree is avoidable.

Improvement in Government Finances

  • Rise in gross tax revenues: Grown 64.2% year-on-year during April-September.
  • Rise in net tax and non-tax revenue receipts: Up 96.3%.
  • Total expenditures rising only 9.9% (Budgeted figures).
  • Fiscal deficit under control: Fiscal deficit for first half of 2021-22 is 35% of estimated 2021 budget.
    • As per Swiss investment bank Credit Suisse, it is lowest since 2007-08 & way below 10-year-average of 74%.
  • Improved corporation and income tax collections: During April-September 2021, it is 28.7% higher than that of April-September 2019.
  • Overall insight: Pandemic had very little impact on revenue collections in 2021-22.

Factors behind the improvement in government finances

  • Increasing formalisation of economy: Demonetisation, GST and lockdown have led to organised sector firms gaining market share from informal enterprises.
  • Improvements in tax compliance: On wake of e-way bills and other systems for tracking transactions and plugging leakages.
  • Petrol and diesel taxes: Centre’s revenues from excise duties (mainly on fuels) have grown 79% compared to that of same period in 2018.

Way Forward: Centre shall consolidate its fiscal gains

  • Bond yields need to managed better: As most central banks signalling their intent to suck out excess liquidity in response to inflation concerns, the pressure on yields may only go up.
  • Cautious withdrawal of stimulus: Indian economy needs no demand stimulus today, but cannot also afford interest rate hikes derailing an ongoing recovery.
  • Tackle economic challenges avoiding a renewed spending spree: Consider slashing fuel excise duties (necessary to curb inflation expectations) and clear GST compensation dues to states (which it has already done).

 

QEP Pocket Notes