Government revenues were strong last year and will likely remain so this year, providing fiscal space.
Data released by the Comptroller General on Tuesday indicated that public finances performed better than expected in the just-ended financial year (2021-22). Strong increases were seen in both tax and non-tax revenue compared to the revised budget forecast presented a few months ago. In addition, with total government spending last year only marginally higher than projected in the revised estimates, the budget deficit for 2021-2022 has narrowed further, standing at 6.7% of the GDP, lower than the 6.9% projected in the revised estimates.
At the aggregate level, the Centre’s gross tax revenue stood at Rs 27.08 lakh crore in 2021-22, nearly Rs 2 lakh crore higher than the revised estimates, which were themselves higher than earlier budget estimates. Better than expected tax revenues were driven by strong direct and indirect tax collections. Direct tax recoveries stood at Rs 13.85 lakh crore, about Rs 1.35 lakh crore higher than revised estimates (corporate and income tax recoveries increasing at an encouraging rate) , while indirect tax recoveries were higher by around Rs 57,000 crore. A similar increase was also seen in non-tax income, due in part to higher RSU dividends. The latest data also indicates that the central government has considerable fiscal space in the coming fiscal year. The Union budget for 2022-23 had pegged the Centre’s gross tax revenue at Rs 27.57 lakh crore – this is now just 1.8% higher than its gross tax revenue in 2021-22. Considering that the recent economic survey forecast the economy to grow by 8-8.5% in 2022-23 – even though this forecast was made before the Russian-Ukrainian conflict and growth is now expected to be lower – because the nominal growth is likely To remain high, actual tax revenue may well be well above budgeted targets.
At the same time, there are several headwinds. On the revenue side, recent cuts in excise duties and the lower than expected transfer from the central bank are expected to dampen revenue. On the expenditure side, spending on food subsidies, fertilizers and LPG will weigh heavily on the treasury. And while higher-than-expected incomes, aided by higher-than-expected nominal GDP growth, will help offset some of that, pressure on the taxman is likely to persist.