The government presents a mixed card in the first quarter on the two cornerstones of its fiscal strategy. On revenue collection, it exceeded expectations. On capital expenditure, it’s below expectations
Despite the second wave shock, the Union government is off to its best revenue collection drive in five years, with revenue collections touching 28% of its budgeted revenues for fiscal 2022 in the first quarter (Apr-Jun) alone. In the three years prior to the pandemic, the centre could only manage 14% of the budgeted revenues for the year in the first quarter. This partly reflected sluggish collections in the first quarter, and partly reflected over-optimistic revenue targets for those years.
The government’s performance is much less impressive when it comes to capex spend. In the June-ended quarter, it has completed only 20% of its budgeted capital expenditure for 2021-22. Even its overall spending, at 24% of budgeted full-year amount, is at its lowest in the last five years.
Budget 2021-22 rested on two broad pillars. The first was a pick-up in the economy. Thus, it projected a 17% increase in gross tax revenues, which would give it room to spend. The second pillar was the centre contributing to growth by creating new assets. So, it projected a 26% increase in its capital expenditure.
It has done well in receipts, but not on capital spending. On 30 June, the Centre directed ministries, with some exceptions, to limit their spending in the second quarter to 20% of the full-year amount, while pressing on capital spending. This suggests an exchequer that is trying to squeeze gains on both the revenue and expenditure sides to manage its fiscal deficit.
The gains on the tax side are perceptible. The Centre’s gross tax revenues increased at an annualized rate of 15% over the quarter ended June 2019 (pre-pandemic period). This increase was driven by direct taxes, which are levied on corporate profits and on individual incomes. Companies have paid 75% more taxes on their earnings, compared to the quarter ended June 2019, and individuals 27% more. Besides the tax deducted at source (usually, 10%), these two categories of taxpayers have to pay 15% of their estimated tax liability for the full year by 15 June.
Indirect taxes, which are levied on consumption, have also grown, but at a slower clip. Collections from the goods and services tax (GST), which accounted for about one-third of all tax revenues, grew 11% in the quarter to June. Overall, this continues the pattern of pandemic-hit 2020-21, with overall corporate earnings and individual incomes increasing, but the buoyancy not permeating to all sections of the economy.
Of its total 2021-22 budget of ₹34.8 trillion, the government budgeted ₹15.5 trillion would come from tax revenues. Another 15.1 trillion, it expected to borrow. Of the remaining ₹4.2 trillion, the main components are selling entities owned by it ( ₹1.75 trillion) and the receipt of dividends from them ( ₹1 trillion). The more it earns from here, the less it has to borrow.
It received a boost from the Reserve Bank of India, via a special dividend of ₹99,122 crore. As a result, it has nearly met its annual dividend target in the first quarter itself. But collections from disinvestment are next to none. Last week, the government said it would meet its 2021-22 targets (). But the two main privatisations carried forward from last year, Air India and BPCL, have been under process since 2018 and November 2020, respectively. Even the big addition this year, stake sale in Life Insurance Corporation, is under process.
The centre needs all the funds it can raise. It needs this to meet the welfare spending it has committed to, and to meet its own massive running expenses. Crucially, from a growth perspective, it also needs funds to frontload and complete the capital spending it promised in Budget 2021-22. So far, the promise to frontload capex spend hasn’t materialized.
As much as 82% of the capital spending projected for the full year is housed in four ministries: defence, road transport and highways, railways and finance. Capital spending by the finance ministry largely comprises support for infrastructure projects. Road transport and highways, and railways, are getting a move on, utilizing 43% and 24% of their full-year capital budgets, respectively, in the first quarter. But defence and finance are laggards, at 16% and 2%, respectively. Similarly unevenness is seen even in other ministries with a relatively smaller capital budget. These have to pick up pace, like the revenue side.
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