The government’s lower borrowing plan for H2 has buoyed the bond markets – istock.com/Denis Vostrikov
While tax revenues are buoyant, the Centre has met its fiscal targets due to realistic budgeting
In a significant break from the past, the Centre seems to be not just meeting, but actually bettering, fiscal projections made in its Budget so far this year. In the April to August 2021 period, the Centre managed to rein in the gap between its total receipts and expenditure at ₹4.68 lakh crore — just 31 per cent of its full-year estimate. In the past decade, this number has usually topped 90 per cent in the first five months. In the corresponding period of FY21, the fiscal deficit had hit 109 per cent of the annual target and in pre-pandemic years of FY19 and FY20, it was at 95 and 79 per cent. The curtailed deficit has allowed the Government to announce a second-half borrowing plan (₹5.03 lakh crore) which is much lower than what it mopped up in the first half (₹7.02 lakh crore). Given that the Government’s usual practice is to back-end its borrowings after overshooting its deficit target, this announcement has pleasantly surprised the bond market which has rallied on the news. While some commentators are already lowering their deficit projections for FY22, much will depend on whether the fiscal performance so far is sustained.
A break-down of the numbers does reveal some structural positives. For instance, the buoyancy in direct tax collections with corporate tax collections shooting up by 162 per cent and income tax revenues by 70 per cent over last year, is not the result of just a low-base effect. Direct tax collections this year are a significant improvement over pre-pandemic levels too, suggesting that Covid may have accelerated the formalisation of the economy which was already underway after GST. Corporate tax collections being higher by 50 per cent compared to FY20, suggests that the sharp cut in corporate tax rates may be paying off through better compliance. The Centre has also managed to keep a tight lid on spending, with its revenue expenditure in the first five months lower than last year’s level, even as capital expenditure was up 27 per cent. Productive heads such as health, agriculture and rural development have seen increases while salaries, pensions and subsidies have been pruned. On the flip side though, high duties on fuel have contributed ₹1.37 lakh crore to the excise kitty and the Reserve Bank of India has paid out a larger-than-usual dividend, neither of which may be sustained. Disinvestment receipts (₹8,370 crore), now at a fraction of the full-year target (₹1.75 lakh crore), will need to catch up for the annual deficit target to be met.
Despite such imponderables though, the fiscal performance so far underlines the virtues of presenting a realistic Budget that makes achievable assumptions on growth and tax buoyancy. Under-promising and over-delivering on the fisc doesn’t just improve the credibility of the ruling government but it also reduces the interest burden on the exchequer, and helps investors and borrowers by smoothing out bond market volatility.