Subdued govt spending despite high tax revenue may impact growth outlook | Business Standard News

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Revenue expenditure, excluding subsidies, shrunk by 9% in the first four months of the current financial year compared to April-July of last year

tax cut, corporate, investment, investors, taxes, india inc, company, firms, revenue, loss, profit, creditThe Budget for FY22 provided a capital outlay of Rs 5.54 trillion, a sharp increase of 34.5 per cent over the Budget Estimate of FY21

The government’s expenditure has contracted in the first four months of the current financial year despite a surge in revenue, driven by tax collections, which may adversely impact economic growth as private investments are yet to pick up.

For instance, the government’s revenues from taxes have grown by 160.9 per cent in the first four months of FY22, while its spending has shrunk by five per cent during the period compared to that in the corresponding period of past year.

In fact, tax collections at Rs 5.3 trillion during April-July this financial year were about 56 per cent higher than even the same period of 2019-20 levels, while total expenditure was 6 per cent higher than the pre-Covid levels.

Tax collections pushed up total revenues of the government to 6.8 trillion during the first four months of 2021-22, higher by 193.4 per cent over that in the corresponding period of the previous financial year. In fact, these were also 70.9 per cent more than those during April-July, 2019-20.

In the first four months, revenue expenditure at Rs 8.7 trillion was 4 per cent lower than 2019-20. Revenue expenditure shrunk by 7 per cent in the first four months of 2021-22 compared to last year.

Revenue expenditure comprises fixed obligations or ongoing operating expenses such as salaries and pensions but helps create demand.

Besides, it is the interest payments under revenue expenditure that are growing, posting a 14 per cent growth over last year. Excluding interest payments, revenue expenditure was, in fact, 13% lower than last year and 1 per cent lower than 2019-20.

Capital expenditure by the government was, however, 15 per cent higher in April-July compared to last year and 19 per cent higher than 2019-20.

However, the government’s capex declined by 39.40 per cent to Rs 16,912 in July this financial year compared to the same month in the previous financial year. It was way down, by 62 per cent, compared to July 2019-20.

The Budget for FY22 provided a capital outlay of Rs 5.54 trillion, a sharp increase of 34.5 per cent over the Budget Estimate of FY21

“The tax collections are hugely larger compared to 2019 levels, whereas there is only a very small increase in government spending. One would have expected the government to spend more given the shocks that we have had,” said Pronab Sen, former chief statistician of India. “The big spending announcements that the government has made are not showing up… The recovery that we have seen is not because of the government, but because of the private sector,” said Sen.

He added that while it is the resilience of the Indian economy that seems to have bailed the country out. India’s GDP grew by 20.1 per cent in the April-June quarter of 2021-22 year-on-year but was 9.2 per cent lower than the level attained in the first quarter of 2019-20

“The increase in tax collection is also worrisome because the non-formal sector has lost significant market share to the formal,” said Sen. While it is good news for the GDP in the short run but bad news for employment… Here, the responsibility rests firmly with the government. If the government doesn’t step up the spending programme, the private drive will taper off,” said Sen, who’s currently the country head of the International Growth Centre (IGC).

Part of the revenue expenditure is on interest obligation and subsidy and reining in that portion is often regarded as prudent fiscal management. Revenue expenditure, excluding subsidies, shrunk by 9 per cent in the first four months of the current financial year compared to April-July of last year. Non-interest, non-subsidy revenue expenditure contracted by 17 per cent over this period.

Aditi Nayar, chief economist, ICRA Ratings said that the contraction in the non-interest non-subsidy component of the government’s revenue expenditure is a concern. “Faster spending will help to deepen the recovery underway as displayed by various high-frequency indicators, and instil greater confidence,” said Nayar.

Devendra Kumar Pant, chief economist, India Ratings said that the contraction in government final consumption expenditure (GFCE) at a time when both private consumption and investment are struggling to provide support to growth is “very perplexing.”

“Due to weak demand conditions, investors are still not ready to invest and private expenditure is growing slowly due to job losses and salary cuts,” said Pant.

“Even with a low deficit in FY22, government borrowing hasn’t declined and they maintain surplus cash leading to G-sec rate remaining elevated…. Higher borrowings keeping interest rate firm and the government is the biggest loser from this,” said Pant.

Gross fixed capital formation (GFCF) in the first quarter of this financial year was, in fact, 17 per cent lower compared to the corresponding quarter of 2019-20 levels.

Private final consumption expenditure, which denotes demand, grew by 19.3 per cent in Q1 year-on-year but is nearly 12 per cent lower than the levels in Q1FY20.

Madan Sabnavis, chief economist, CARE Ratings said that the second lockdown came in way of spending by the government. “Most are still announcements and not yet in action,” said Sabanvis.

He added that there was also less relief expenditure this year, unlike last year when MNREGA was high.

However, a senior finance ministry official argued that last year’s base was not a normal base owing to a lot of pandemic- specific expenditure that was incurred including transfers to Jan Dhan accounts EPFO payments and certain subsidies. Besides, in the current fiscal, several schemes by ministries were on low key due to the second Covid-19 wave in April and May and that means that revenue budget schemes by ministries suffered, he said.

“But, capex is going up, which is what we wanted. Besides we have reserved about Rs 44,000 crore with the department of economic affairs, which is available to be given to any department and ministries who can usefully incur the expense” said the official.

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