New revenue measures give hope to FinMin to rein in twin deficit

Rejig of export-import levies along with levying of windfall gain tax expects to address the issue of twin deficit, a report by the Finance Ministry said on Thursday. It also said that last 40 days of current fiscal has given some comfort on macroeconomic front.

Twin deficit refers to fiscal deficit and current account deficit (CAD). “Recent revenue generation measures announced by the government will not only help to rein in the rise in the current account deficit but also ensure that fiscal slippage, if any, is well contained,” Monthly Economic Review for June and prepared by Economic Affairs Department of Finance Ministry said.

Windfall tax

Earlier this month, the government imposed tax on windfall gain by domestic crude oil explorer. At the same time, export duty on petrol, diesel and jet fuel was raised. Also, import duty on gold hiked. Although government has not given any estimate of additional revenue from these measures, but expectation is that may get more than ₹1 lakh crore which could balance the revenue foregone on account of excise duty reduction.

Post reduction of excise on petrol and diesel in May and higher outlay for fertiliser subsidy raised the apprehension of fiscal deficit exceeding budget estimate of 6.4 per cent. At the same time, higher prices of crude and commodity prices in global market combined with depreciating rupee raised the estimate of CAD to 2 per cent of GDP (Gross Domestic Products).

The report said the government’s sustained focus on expanding capital expenditure has resulted in its year-on-year growth of 70.1 per cent in May. To further facilitate capex, the government has also announced rules for disbursing ₹1-lakh crore in interest-free capex loans to States.

“Sustained focus on capex may appear to pose a challenge to maintaining the budgeted fiscal deficit to GDP ratio, particularly when union excise collections during April-May 2022 have declined, following a cut in excise duty on petrol and diesel to curb rising inflation. However, robust GST collection, increase in customs duties, and imposition of windfall tax are expected to boost government revenues and assist in keeping the fiscal deficit to GDP ratio unchanged from its budgeted level,” it said.

Macroeconomic parameters

The report further highlighted that economic activity is holding up better than expected despite the ongoing geopolitical tensions; rise in interest rates in America and in India and the elevated price of crude oil and few other commodities. The services sector recovery is continuing and manufacturing strength is steady. There is an apparent keenness to invest on the part of the private sector.

It also said that banks are willing to lend and their financial health, as the central bank’s stress tests reveal, is quite strong. Brisk GST receipts monthly confirm the momentum in the economic activity. Recent moderation in the international prices of food items, industrial metals and even crude oil are welcome developments for India’s inflation control.

“In sum at the margin, June and the first ten days of July were better for Indian macro than the first two months of the current financial year. That is some cause for relief and even cautious optimism in these times,” the report said while reminding  that these are still early days in the financial year and there are still many challenges to overcome. The Federal Reserve continues to tighten. Global liquidity conditions will tighten and asset market declines can dampen sentiment and curb spending. geopolitical risks, near and afar, are rife.

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