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CHAPTER 3- Fiscal Developments: Revenue Relish

Developments in Union Government finances

• Although India's finances were already stretched before the pandemic, the Government's careful and calculated budgetary approach allowed steady public finances despite the current uncertainty. 

• The fiscal deficit of the Union Government, which reached 9.2 percent of GDP during the pandemic year FY21, has moderated to 6.7 percent of GDP in FY22 PA and is further budgeted to reach 6.4 percent of GDP in FY23.

• This gradual decline in the Union government's fiscal deficit as a percent of GDP, in line with the fiscal glide path envisioned by the government, is a result of careful fiscal management supported by buoyant revenue collection over the last two years.

Union Government on track to achieve the Fiscal deficit target for FY23-

• Despite a macroeconomic recovery, the Union Budget for FY23 was unprepared for the geopolitical changes that took place throughout the year.
• Early in the year, when the European battle began, supply problems were made worse and prices for food, fuel, and other necessities increased.
• The government's fiscal policy response necessitated additional spending on food and fertilizer subsidies, accompanied by specific duty cuts to control the pass-through of the high imported prices to the consumers/ users.
• The Union Government is on pace to meet the budget estimate for the fiscal deficit in FY23 notwithstanding further constraints on the nation's financial resources throughout the year
• The fiscal deficit of the Union Government at the end of November 2022 stood at 58.9 percent of the BE, lower than the five-year moving average of 104.6 percent of BE during the same period.

Performance of Union Government Non-debt Receipts

• The Union government's non-debt receipts comprise revenue receipts (tax and non-tax) and non-debt capital receipts. 
• Government borrowing makes up the shortfall in non-debt receipts to meet the expenditure demand (called fiscal deficit).
• The performance of the Union Government's financial receipts side is assessed in this area.

Direct taxes propelling the growth in Gross tax revenue

• Direct taxes, which broadly constitute half of the Gross Tax Revenue (Figure III.3), have registered a YoY growth of 26 percent from April to November 2022, enabled by corporate and personal income tax growth. 
• The major direct taxes experienced growth rates in the first eight months of FY23 much greater than the corresponding longer-term averages.  

Customs and Excise duties act as Flexi-fiscal policy tools 

• Indirect taxes, like customs and excise levies, have served as flexible policy options during the fiscal response to the pandemic, while direct taxes have protected the revenue buoyancy.
• The government increased the excise levy on petrol and diesel to increase revenue when the pandemic year FY21 had a negative impact on the collection of and low global oil prices gave them some leeway to do so.
• The government then cut the excise duty in November 2021 and May 2022 to prevent customers from paying more for increasingly expensive global oil as other taxes rebounded and inflationary pressures grew in the economy.

Stabilising Goods and Services Tax yielding returns-

• The Goods and Services Tax (GST) has evolved and stabilized as a vital revenue source for central and state governments.

• Together, their gross GST receipts totaled 13.40 lakh crore from April to December 2022. Consequently, a YoY growth of 24.8 percent is implied.
• The pick-up in GST collections was evenly distributed throughout the current fiscal year, with an average monthly collection of 1.5 lakh crore.
• The national campaign against GST evaders and fake bills, numerous systemic changes recently put into place, the quick economic recovery following the pandemic, and various rate rationalization initiatives taken by the GST Council to correct the inverted duty structure are all to blame for the increase in GST collections.
• As a consequence of consistent work, the GST net has doubled, with the number of GST taxpayers rising from over 70 lakh in 20172 to more than 1.4 crore in 2022.
• GST has improved income reporting, which has good externalities for income tax collection and economic activity aside from directly supporting government revenues.

Centre on track to meet Non-Tax Revenue targets-

• Most of the Centre's non-tax revenue comes from dividends and profits from Public Sector Enterprises and the Reserve Bank of India, outside grants and payments for services provided by the Union Government, and interest on loans to States and Union Territories.
• In comparison to FY22, the budget for FY23 anticipated a collection of non-tax revenue receipts that was around 22.5 percent lower.
• Up until November 2022, 73.5 percent of the budgeted money had been collected.

Committed towards disinvestment but dependent on external factors-

• Apart from the tax and non-tax revenue of the Union Government, non-debt capital receipts, which comprise recovery of loans and advances, and disinvestment receipts, have evolved as an important component of the non-debt receipts for the Union Government. During FY15 to FY23 (as of 18 January 2023), an amount of about ₹4.07 lakh crore has been realized as proceeds from disinvestment through 154 transactions using various modes/instruments. This includes ₹3.02 lakh crore realized from minority stake sale and ₹69,412 crore3 realized from strategic disinvestment transactions (in 10 CPSEs - HPCL, REC, DCIL, HSCC, NPCC. NEEPCO, THDC, Kamrajar Port, Air India, and NINL)
• The intentions and prospects of the government's disinvestment transactions during the past three years have been challenged by the pandemic-induced uncertainty, the geopolitical turmoil, and the accompanying risks.
• Nevertheless, the government has reaffirmed its commitment towards privatization and strategic disinvestment of Public Sector Enterprises by implementing the New Public Sector Enterprise Policy and Asset Monetisation Strategy. 
• Out of the budgeted amount of ₹65,000 crore for FY23, 48 percent has been collected as of 18 January 2023.

Capex-led growth to bring back animal spirits and manage debt levels

• In absolute terms, the Government of India had budgeted an unprecedented ₹7.5 lakh crore of Capital Expenditure for FY23, of which more than 59.6 percent had been spent from April to November 2022. 
• During this period, capital expenditure registered a YoY growth of over 60 percent, much higher than the long-term average growth of 13.5 percent recorded in the corresponding period from FY16 to FY20.
• The Government's thrust on Capital expenditure, particularly in the infrastructure-intensive sectors like roads and highways, railways, and housing and urban affairs, has longer-term implications for growth. 
• While on the one hand, capital expenditure strengthens aggregate demand and crowds-in private spending in times of risk aversion; it also enhances the longer-term supply-side productive capacity. 
• Capital spending has been important as there are early indications of a recovery in private sector investments in recent months.
• The Center offered many incentives to encourage states' capital expenditure in the form of long-term interest-free loans and capex-linked additional borrowing provisions in order to push for increasing Capex from all angles.

Geopolitical developments stretched the Revenue Expenditure requirements-

• The significant components of the Centre's revenue expenditure include Interest payments, major subsidies, salaries of Government employees, pensions, defense revenue expenditure, and transfers to States. 
• A substantial portion of the Centre's revenue expenditure is committed and allows limited flexibility in creating additional fiscal headroom if required. However, re-prioritizing expenditure and rationalizing subsidies are essential tools to stimulate aggregate demand and fulfill redistributive imperatives.
• Due to the sudden outbreak of geopolitical conflict resulting in higher international prices for food, fertilizer, and fuel, there was a higher food and fertilizer subsidy requirement for supporting the people and ensuring macroeconomic stability. 
• Around 94.7 percent of the budgeted expenditure on subsidies has been utilized from April to November 2022. 
• In the first batch of Supplementary Demands for Grants for FY23, the Union Government has sought an additional ₹80,000 crore for the expenditure towards food subsidy and additional allocation under Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) and ₹1.09 lakh crore for fertilizer subsidy required during the year. 
• As a result, the revenue expenditure from April to November 2022 has grown by over 10 percent on a YoY basis, higher than the growth noted in the corresponding period last year.
• Higher resource requirements and lower revenue collections during the pandemic resulted in higher borrowings by the Union Government. 
• Following the pandemic epidemic, interest payments as a percentage of collections increased.  
• However, in the medium term, as we move along the fiscal glide path, buoyancy in revenues, aggressive asset monetization, efficiency gains, and privatization would help pay down the public debt, thus bringing down interest payments and releasing more monies for other priorities.

Cooperative fiscal federalism drives a well-targeted fiscal policy

• Pragmatic expenditure policy of re-prioritization: 

• During the Pandemic of 2021, the total expenditure of the Union Government in FY21 rose to 17.7 percent of GDP, higher than the previous 5-year average of 12.8 percent of GDP. In the subsequent year, FY22, the total Union Government expenditure was brought down to 16 percent of GDP (PA), and a more significant proportion of this accrued to capital expenditure. 

• The capital expenditure by the Centre has steadily increased from a long-term average of 1.7 percent of GDP (FY09 to FY20) to 2.5 percent of GDP in FY22 PA. This development has to be seen in the background of the Government of India focusing on capital expenditure which would make way for future economic development rather than revenue expenditure and appeasing the people. 

• Capex-led growth to bring back animal spirits and manage debt levels: The Government of India had budgeted an unprecedented ₹7.5 lakh crore of Capital Expenditure for FY23, of which more than 59.6 percent has been spent from April to November 2022. During this period, capital expenditure registered a growth of over 60 percent, much higher than the long-term average growth of 13.5 percent. An increase in capital expenditure indicates making ground that can be used for economic gains by animal-spirited individuals. 

• Geopolitical developments stretched the Revenue Expenditure requirements: With the winding up of the pandemic-related support, the revenue expenditure of the Union government was brought down from 15.6 percent of GDP in the pandemic year FY21 to 13.5 percent of GDP in FY22 PA. Due to the sudden outbreak of geopolitical conflict, the Union Government has sought an additional ₹80,000 crore for the expenditure towards food subsidy and additional allocation under Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) and ₹1.09 lakh crore for fertilizer subsidy required during the year. As a result, the revenue expenditure from April to November 2022 has grown by over 10 percent on a YoY basis. 

• Interest payments of receipts went up after the pandemic outbreak. However, in the medium term, as we move along the fiscal glide path, buoyancy in revenues, aggressive asset monetization, efficiency gains, and privatization would help pay down the public debt, thus bringing down interest payments and releasing more monies for other priorities. 

OVERVIEW OF STATE GOVERNMENT FINANCES-

• Performance of State finances: The combined Gross Fiscal Deficit (GFD) of the States, which increased to 4.1 percent of GDP in the pandemic-affected year, was brought down to 2.8 percent in FY22 PA. Given the geopolitical uncertainties, the consolidated GFD-GDP ratio for States has been budgeted 3.4 percent in FY23. However, the States’ Monthly Fiscal Accounts data released by CAG shows that from April- November 2022, the combined borrowings of the 27 major states have just reached 33.5 percent of their total budgeted borrowings for the year.
• The Centre enhanced the net borrowing ceilings (NBC) for States to 5 percent of GSDP in FY21, 4 percent of GSDP in FY22, and 3.5 percent of GSDP in FY23. 
• As per FY23 Budget Estimates of the State Governments, the States’ combined own Tax revenue and own Non-Tax revenue were anticipated to grow at 17.5 percent and 25.6 percent, respectively, over FY22 RE. 
• On the expenditure side, revenue and capital expenditures in FY22 BE were envisaged to grow at 10.4 percent and 16 percent, respectively, over FY22 RE.
• The capital outlay of States grew by 31.7 percent in FY22 PA. This increase is attributable to strong revenue buoyancy and the support provided by the Centre in terms of advance releases of payments to the states, GST compensation payments, and interest-free loans.

Transfer from Centre to States

• The amount of money transferred to the States includes their portion of devolved Union taxes, grants from the Finance Commission, contributions to Centrally Sponsored Schemes (CSS), and other payments.
• Between FY19 and FY23 BE, the total transfers to the States have increased.

Supporting the GST compensation payments during crisis-

• In addition to the regular stream of revenues from GST, compensation was also provided to the states in the post-GST period.
• Since GST was a new tax the compensation scheme was designed to safeguard the states from any difference in the new versus the old tax regime ensuring steady revenue growth of 14% per annum for 5 years.
• It is important to emphasise that the compensation system was not intended to serve as a safety net for the state's finances in the event that tax revenues declined due to a slowdown in economic growth. 

• However, the pandemic's occurrence has brought attention to the importance of GST Compensation as a revenue cushion for the States.

• During FY21, revenues for centers and states were adversely affected due to the economic contraction. 
• Despite a drop in CGST and compensation cess revenues, the states' demand for compensation climbed significantly.
• In addition to the usual payment of GST compensation, the Centre borrowed money despite having limited financial resources in the midst of a crisis and handed it on to States on a back-to-back loan basis.
• These loans are not a burden on the states because they will be repaid from future contributions to the GST Compensation Cess Fund.

Enhanced limit of borrowing for the States and incentives for reform

• Since the pandemic outbreak, the Centre has kept the Net borrowing Ceiling of the State Governments above the Fiscal Responsibility Legislation (FRL) threshold.
• It was fixed at 5 percent of GSDP in FY21, 4 percent of GSDP in FY22, and 3.5 percent of GSDP in FY23. 
• A part of this additional borrowing was linked to reforms encouraging the States to undertake them.
• Despite having limited fiscal resources in the middle of a crisis, the Centre borrowed funds and passed them on to States on a back-to-back loan basis, in addition to the release of regular GST compensation. 
• These loans will be repaid from future inflows into the GST Compensation Cess Fund and hence are not a burden on the states. 

Enhanced limit of borrowing for the States and incentives for reforms 

• Since the pandemic outbreak, the Centre has kept the Net borrowing Ceiling of the State Governments above the Fiscal Responsibility Legislation (FRL) threshold. 
• It was fixed at 5 percent of GSDP in FY21, 4 percent of GSDP in FY22, and 3.5 percent of GSDP in FY23. 
• A part of this additional borrowing was linked to reforms encouraging the States to undertake them.
• For instance, in FY21, a part of the additional borrowing ceiling was conditional on implementing the 
• 'One Nation One Ration Card' System, 

• ease of doing business reform, 

• Urban Local body/ utility reforms, and 

• power sector reforms.

• As a result, 

• 17 States implemented the One Nation One Ration Card System, 

• 20 States completed the stipulated reforms in the Ease of Doing Business,

• 11 States had done local body reforms and 

• 17 States carried out fully/partly Power Sector Reforms.

• Similarly, a part of the additional borrowing was earmarked for incremental capital expenditure to be incurred by States during FY22. Sixteen states accessed the additional borrowings upon meeting the Capex target.
• In addition to the net borrowing ceilings fixed for the States, Fifteenth Finance Commission had recommended performance-based additional borrowing space of 0.50 percent of Gross State Domestic Product (GSDP) to the States in the power sector. 
• This special dispensation has been recommended for each year for four years, from FY22 to 2024-25. 
• For the financial year FY22, additional borrowing permission of ₹39,175 crore was allowed to 12 States for meeting the stipulated reform criteria.      

Debt Profile of the Government- 

• Given the unprecedented fiscal expansion in 2020, rising government liabilities have emerged as a significant concern across the globe. 

• IMF projects9 the global government debt at 91 percent of GDP in 2022, about 7.5 percentage points above the pre-pandemic levels. 

• While countries worldwide had started winding up the fiscal support provided during the pandemic, challenging global financial conditions amidst global uncertainties tightened budget constraints.
• Of the Union Government's total net liabilities in end-March 2021, 95.1 percent were denominated in domestic currency, while sovereign external debt constituted 4.9 percent, implying low currency risk. 
• Further, sovereign external debt is entirely from official sources, which insulates it from volatility in the international capital markets.
• It is estimated to decline to 84.5% of GDP by the end of March 2022.
• The emphasis on capex led growth will enable India to keep the growth interest rate  differential positive.
• A positive growth interest rate differential keeps the debt level sustainable.