Government Budgets

challenges the second Covid wave poses to India’s path to fiscal consolidation.

Note4Students

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.

Conclusion

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.
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