From UPSC perspective, the following things are important :
Prelims level : Tax buoyancy
Mains level : Paper 3- Recalibration of growth projections
The article highlights the challenges the second Covid wave poses to India’s path to fiscal consolidation.
Recalibration to growth projection due to second Covid wave
- The growth projections of different national and international agencies and the fiscal projections of Centre’s 2021-22 Budget require recalibration.
- The International Monetary Fund (IMF) had forecast real GDP growth for 2021-22 at 12.5%.
- The Reserve Bank of India (RBI) had forecast real GDP growth for 2021-22 at 10.5%.
- The Ministry of Finance’s Economic Survey had forecast real GDP growth for 2021-22 at 11.0%.
Growth rate of 8.7% to keep GDP at same level as in 2019-20
- Moody’s has recently projected India’s GDP growth in 2021-22 at 9.3%.
- Benchmark growth rate: 9.3% is close to the benchmark growth rate of 8.7% which would keep India’s GDP at 2011-12 prices at the same level as in 2019-20.
- This level of growth may be achieved based on the assumption that the economy normalises in the second half of the fiscal year.
- The 2019-20 real GDP was ₹145.7-lakh crore at 2011-12 prices.
- It fell to ₹134.1-lakh crore in 2020-21, implying a contraction of minus 8.0%.
- At 8.7% real growth, the nominal GDP growth would be close to 13.5%, assuming an inflation rate of 4.5%.
- This would be lower than the nominal growth of 14.4% assumed in the Union Budget.
- At 13.5% growth, the estimated GDP for 2021-22 is ₹222.4-lakh crore at current prices.
- Impact: This will lead to a lowering of tax and non-tax revenues and an increase in the fiscal deficit as compared to the budgeted magnitudes.
How much the gross tax revenue would be impacted?
- The budgeted gross and net tax revenues for 2021-22 were ₹22.2-lakh crore and ₹15.4-lakh crore, respectively.
- The assumed buoyancy for the Centre’s gross tax revenues (GTR) was 1.2.
- If, however, the buoyancy of 1.2 proves optimistic and instead a buoyancy of 0.9, which is the average buoyancy of the five years preceding the COVID-19 year, is applied, the nominal growth of GTR would be 12.2%.
- This would lead to the Centre’s GTR of about ₹21.3-lakh crore.
- The corresponding shortfall in the Centre’s net tax revenues is estimated to be about ₹0.6 lakh crore.
- The budgeted magnitudes for non-tax revenues and non-debt capital receipts at ₹2.4-lakh crore and ₹1.9-lakh crore, respectively, may also prove to be optimistic.
- In these cases, the budgeted growth rates were 15.4% and 304.3%, respectively.
- The excessively high growth for the non-debt capital receipts was premised on implementing an ambitious asset monetisation and disinvestment programme.
- Together with the tax revenue shortfall of nearly 0.6 lakh crore, the total shortfall on the receipts side may be about ₹2.1-lakh crore.
Impact on fiscal deficit estimates
- Two factors will affect the fiscal deficit estimate of 6.76% of GDP in 2021-22.
- First, there would be a change in the budgeted nominal GDP growth.
- Second, there would be a shortfall in the receipts from tax, non-tax and non-debt sources.
- Together, these two factors may lead to a slippage in fiscal deficit which may be close to 7.7% of GDP in 2021-22 if total expenditures are kept at the budgeted levels.
- This would call for revising the fiscal road map again.
- Protecting total expenditures at the budgeted level is, however, important given the need to support the economy in these challenging time.
Vaccination policy and role of Central government
- Positive externalities: COVID-19 vaccination is characterised by strong inter-State positive externalities, making it primarily the responsibility of the central government.
- The entire vaccination bill should be borne by the central government.
- If the central government is the single agency for vaccine procurement, the economies of scale and the Centre’s bargaining power would keep the average vaccine price low.
- The central government may transfer the vaccines rather than the money that it has budgeted for transfer.
- Some of the smaller States may find procuring vaccines through a global tender to be quite challenging.
Protecting total expenditures at the budgeted level and mass vaccination are important in India’s pandemic situation.
Back2basics: Tax buoyancy
- There is a strong connection between the government’s tax revenue earnings and economic growth.
- Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP.
- It refers to the responsiveness of tax revenue growth to changes in GDP.
- When a tax is buoyant, its revenue increases without increasing the tax rate.
- In 2007-08, everything was fine for the economy, GDP growth rate was nearly 9 per cent.
- Tax revenue of the government, especially, that of direct taxes registered a growth rate of 45 per cent in 2007-08.
- We can say that the tax buoyancy was five (45/9).
What is tax elasticity?
- It refers to changes in tax revenue in response to changes in tax rate.
- For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity.