Govt should prepare for medium-term challenges
The decline in the number of Covid cases over the past several weeks in large parts of the country has allowed state governments to gradually relax restrictions on mobility and economic activity. The idea of allowing state governments to impose and lift restrictions, depending on the caseload, has been significantly less damaging for economic activity than during the nationwide lockdown last year. A lower than expected decline in economic activity during the second wave also helped government finances and placed the Union government in a comfortable position compared to last year, when revenue collection had virtually collapsed.
The data released by the Controller General of Accounts last week shows that the fiscal deficit in the first quarter of the current fiscal year stood at 18.2 per cent of the Budget Estimates (BE), compared to 83.2 per cent in the corresponding period last year. The government was able to contain the deficit largely because of better revenue collection. Tax collection at Rs 4.12 trillion was 26.7 per cent of the BE. The government also benefited from a higher than expected surplus transfer from the Reserve Bank of India. Consequently, it attained over 50 per cent of the full-year non-tax revenue target in the first three months itself. The numbers suggest that revenue collection could exceed the Budget targets. However, one area that continues to underperform is disinvestment, with no significant movement in the first quarter despite a buoyant stock market.
The overall fiscal position suggests that the government should be able to spend more freely and attain its expenditure targets, which will help support the recovery process. Capital expenditure, for instance, increased by 26 per cent during the first quarter over last year, though it was still about 20 per cent of the BE. It is hoped that capital expenditure will pick up in the coming months. Total expenditure during the quarter was at about 24 percent of the BE. Although the government is in a comfortable fiscal position with respect to the targets set at the beginning of the year, the medium-term outlook remains challenging. The government is targeting to restrict the fiscal deficit at 6.8 per cent of gross domestic product this fiscal year and intends to reduce it to below 4.5 per cent by 2025-26. This means that the fiscal deficit and public debt will remain elevated in the medium term, which would affect the government’s ability to support growth. Sustained higher levels of government borrowing will affect interest rates and activity in the private sector.
Furthermore, a comparatively slow pace of vaccination means that the full recovery would get delayed. The International Monetary Fund, for instance, has lowered its growth projection for emerging market economies, including India. A delayed recovery would increase risks and make fiscal consolidation more difficult. Thus, the government would be well advised to prepare a clear medium-term fiscal road map, preferably accounting for different scenarios, and work on increasing revenue. It will need to particularly focus on goods and services tax (GST). Although GST collection has improved in recent months, the issue of rate rationalisation must be addressed to make it revenue-neutral. This will also provide an opportunity to simplify the GST system. Therefore, though the revenue situation has improved this year, the government still has a long way to go to secure India’s fiscal health.