The FY24 budgetary exercise has just begun and a quick stock-taking of the Union finances only indicates the need for a muscular approach to balance income and expenditure.
Revenue collections remain buoyant, with gross direct tax collections leading from the front of the queue. As of October 8, they increased by 23.8 per cent year-on-year (YoY) to Rs 8.98 lakh crore, led by handsome corporate and personal income tax collections.
It’s estimated that direct tax collections will likely surpass the FY23 budget target of Rs 14.2 lakh crore by at least Rs 1.8-2 lakh crore, thanks to higher compliance and a favourable base effect.
Likewise, indirect tax collections too will likely surpass the budgeted target of Rs 13.38 lakh crore by a decent margin, aided by healthy GST collections. In the six months of the fiscal, GST collections grew by 13.8 per cent on a three-year CAGR basis, suggesting a widening of the tax base, five years following its rollout.
Yet, the Centre’s fiscal condition remains under pressure given the additional expenditure of Rs 2.6 lakh crore, primarily due to food subsidies of about Rs 1.25 lakh crore, and fertilizer subsidies of Rs 1.15 lakh crore. The good news is, the government is mindful not to breach the borrowing plan and manage the fisc with expenditure control.
Between April and August, revenue expenditure and capital expenditure maintained momentum at 35.6 per cent and 33.6 per cent of the budgeted levels, respectively.
While the Centre has been fairly aggressive with its CAPEX outlay of Rs 7.5 lakh crore, states too have an equally important role but have been slower with just about 15-20 per cent of the budgeted amount being spent until August.
Interestingly, of the projected Rs 6.92 lakh crore states’ CAPEX, 65 per cent is concentrated among large states like Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu, Gujarat, Madhya Pradesh, Odisha, Rajasthan and West Bengal. During the last fiscal, 13 states, including larger states like Karnataka, Gujarat, and Tamil Nadu underachieved their CAPEX targets.
Growth needs an equal push from both the Centre and states and given that states often go slow on CAPEX in the initial months and spending accelerates in the last quarter, there’s the anticipation of a spending binge in the coming months. The fact that GST collections have been buoyant for both the Centre and state further raises hopes of government expenditure driving growth.
While the quality of expenditure is important, fiscal consolidation concerns aren’t far behind. The general government fiscal deficit is high at around 10 per cent and worryingly debt-to-GDP is likely to remain above the pre-Covid levels over the next decade. It’s essential that the government reverts to the fiscal consolidation path soon to ensure the impact on demand and interest rates is manageable.
Market borrowings nearly doubled since the pandemic, which is unlikely to reverse soon worsening the bond demand-supply gap given the expected deceleration in the bank demand. Consequently, interest payments as a proportion of revenue shot up limiting finances for productive expenditure.
Higher subsidies on fertilisers, coupled with fuel excise duty cuts helped minimise the inflationary impact, but its fallout can be felt in the fiscal math. Despite high nominal GDP growth, and buoyant tax collections, the fiscal deficit remains high and without any expenditure cuts, it may touch 6.6 per cent of the GDP.
Given the upcoming state and national elections, expenditure rationalisation seems unlikely, and fiscal policy will likely continue being expansionary.
But for now, the bond markets aren’t squeaking, with the Centre sticking to the lower-than-expected Rs 5.92 lakh crore borrowing plan for the next six months, as against the expected Rs 6.02 lakh crore. Any slippage may be financed through higher short-term borrowings and other sources such as small savings and cash balances.
ALSO READ | Budget spend down by 4.7% in April-Aug
Government revenues
Direct tax collections likely to surpass FY23 budget target of Rs 14.2 lakh crore by Rs 1.8-2 lakh crore
As of October 8, direct tax collections increased by 23.8 per cent YoY to Rs 8.98 lakh crore.
Indirect tax collections are likely to surpass the budgeted target of Rs 13.38 lakh crore by a decent margin
In the six months of the fiscal, GST collections grew by 13.8 per cent on a three-year CAGR basis Centre’s fiscal condition remains under pressure due to additional expenditure of Rs 2.6 lakh crore on account of food and fertilizer subsidies