Why the record low fiscal deficit of June quarter is unlikely to sustain

The fiscal deficit number for the June quarter for FY22 was a little surprising given the higher fiscal spending due to the second wave of Covid-19 and its impact on the economy. But since this is just the first quarter, not much can be read in to these numbers.

The fiscal deficit for this June quarter was ₹2,74,245 crore, about 58.6 per cent lower than the June quarter of FY21 and 36 per cent lower than the corresponding quarter in FY20. Robust direct tax collections and the surplus transfer from the RBI have saved the day, combined with a tighter rein on revenue expenditure. But there are many reasons why the number is likely to expand in the coming quarters.

Direct tax collections soar

The reduction in fiscal deficit was mainly due to a large jump in both tax and non-tax revenue receipts in the June quarter of this fiscal year. The RBI’s surplus transfer of ₹99,122 crore, much higher than the budgeted amount of ₹61,286 crore helped increase the non-tax revenue by 738 per cent to ₹1,27,317 crore.

But the jump in direct tax collection is a little more difficult to explain. Corporation tax collection for Q1 FY22 was at ₹1,23,689 crore. This is more than double the amount collected in the corresponding quarter of FY21. Surprisingly, this is also 75 per cent higher than the collection in the same quarter in FY20, which was a pre-pandemic period. The collection trend in income tax is also equally robust.

“It’s difficult to ascertain why there is a jump in direct tax collection in one quarter. Clearly the pandemic impact on activity has been lesser than expected,” says Madhavi Arora, Lead Economist, Emkay Global Financial Services. “Profitability of large corporates and income of individuals was not impacted too badly due to the pandemic. Companies have improved profitability with cost cuts and so on. That could perhaps account for the jump in corporation tax.”

However, with corporation tax collection in the first quarter is based on estimation of the profitability for the entire year, there is a possibility that the collections can be less robust in the coming quarters based on the perception regarding the impact of the pandemic.

The jump in direct taxes is at odds with the change in GST collections. GST collected this June quarter was almost on par with the collection in the corresponding quarter of FY20.

Expenditure under check

The lowering of fiscal deficit has also been made possible by reining in all non-essential revenue expenditure. Revenue expenditure is lower by 2 per cent despite a 14 per cent increase in interest payments. This is likely to change in the coming quarters due to the higher outgo on due to the second wave of the pandemic.

With the Budgeting exercise being cash-based, many of these payments may be accounted for in the subsequent quarters of this fiscal year.

“For 2021-22, on the revenue side, the slippage could be in divestment while tax collections and surplus transfer from RBI provide comfort. On the expenditure side, there is likely to be a higher outgo on food, fertiliser, MNREGA and health than initially budgeted. Since most ministries have been asked to be judicious about their non-essential revenue expenditure, overall revenue expenditure can be lower. But I don’t expect any cut in capital expenditure,” adds Arora.

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