Fisc on track

The fiscal deficit for the first half of 2021-22 being at 35 per cent of annual budget estimate may have made economists optimistic about a reduction in the deficit number for the whole year, but that may not be on the cards. While robust tax and non-tax revenue and a tight rein on non-essential expenses have helped keep the deficit in check in the first half, conditions could be quite challenging in the second. Relief given to various segments to counter rising prices and higher revenue expenditure in the coming months could expand the deficit. The Centre will not be able to use the conventional method of arriving at the revised expenditure for the second half of the year, using expenses in the first half, as explained by the Finance Secretary, TV Somanathan, in a recent interview with this newspaper. It will have to make the revised estimates more realistic and this is likely to make the fiscal deficit increase, taking it closer to the budget estimate. The Centre should, however, stay on the path of improving the quality of expenditure by pushing capital expenditure while reducing wasteful revenue spends.

While direct tax collection may continue to be robust in the second half of the fiscal year, some of the changes in indirect taxes can impact the deficit for the full year. For instance, the recent reduction in excise duty on petrol by ₹5 and on diesel by ₹10 is expected to reduce revenue by ₹45,000 crore, according to Nomura. Measures taken to temper edible oil prices by rationalising the import duties will impact tax collections in the coming months too. Additional outgo on account of fertiliser subsidy for rabi crop, increase in Covid-19 vaccination expense (estimated to go up to ₹50,000 crore from the budgeted ₹35,000 crore), along with removal of the curbs imposed on non-essential expenditure of various Ministries, will further increase the Centre’s expenditure in the second half of this year. As the pressure on Centre’s finances increase, care should be taken that the momentum in capital expenditure is maintained. Capital expenditure of the Centre was 38 per cent higher in the first six months of 2021-22 when compared to the corresponding period last year; while revenue expenditure recorded a lower increase of just 6 per cent. Despite the difficulties posed by the pandemic, the Centre needs to remain parsimonious with revenue expenses in order to enable higher capital spends.

The States need to be nudged to improve their own capital expenditures and cut back on wasteful revenue spends. With around two-third of the capital spends having to be borne by State governments, the nature of their expenditure plays an important part in the revival of the economy. With many States’ finances in dire straits, Centrally funded projects are also at risk of getting stalled, due to lack of State government support. If the economy has to move on the path of sustainable growth, the States too need to spruce up their act, cut profligate expenses and spend on productive asset creation.

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