Fiscal Consolidation: The 2022 challenge

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Fiscal Consolidation: The 2022 challenge

Monday, 24 January 2022 | Vinay K Srivastava

Fiscal Consolidation: The 2022 challenge

Not meeting disinvestment targets will nullify tax revenue gains

The next budget would be against the backdrop of gradual recovery taking place in the economy hit by the Covid-19 pandemic and the emergence of the Omicron variant. The fiscal deficit that reached 4.6 per cent in FY19-20 against the budget estimate of 3.3 per cent and revised estimate of 3.8 per cent, had increased to 9.5 per cent against the target of 3.5 per cent in FY20-21. A steep rise in fiscal deficit in the last fiscal was the impact of pandemic on the economy resulting in a weak revenue inflow. This was combined with an increase in total expenditure by `7.64 lakh crore in FY20-21 and `4.08 lakh crore in FY21-22 to provide essential relief to weaker sections of the society. As expected, the capital expenditure was also increased to `1.03 lakh crore in FY20-21 and `1.15 lakh crore in FY21-22 preferably on infrastructure and capital assets to pursue growth. There is much talk of fiscal consolidation and stratagems all around. The Government intend to continue with the path of fiscal consolidation and has set a guide path to reduce the fiscal deficit from 6.8 per cent of the GDP in financial year 2022 to 4.5 per cent of GDP by FY25-26 by increasing the buoyancy of tax revenue through improved compliance and by increased revenue from monetisation of assets and disinvestment of CPSUs. On the tax revenue front, the Government has undertaken crucial tax reforms to address the issue of the fiscal deficit and boost investments since 2020-21. Tax buoyancy is the result of these reforms. The broad trend in tax collection is expected to continue despite a third wave of pandemic and associated disruption in economic activity. Hence, the actual size of the fiscal deficit for the current financial year will be dependent on the realization of proceeds from disinvestment of CPSUs and monetisation of assets. Hitherto, the amount realized from disinvestment is only `9,364 crore against the target of `1.75 lakh crore. It is only five per cent of the target. The Government is also looking to collect `0.88 lakh crore through monetisation in the current fiscal.

However, the fiscal data released by the CAG for April-November on December 30 give us a good signal. The fiscal deficit for April-November dipped at `6.96 lakh crore. It is just 46 per cent of the budget estimate for FY22 due to a higher-than-expected revenue collection. It is much better than last fiscal when it had reached 135 per cent and 102.4 per cent in FY20. But we should note that the favourable size of the fiscal deficit is due to improvement in investment (gross fixed capital formation - (GFCF), buoyant revenue and better control over revenue expenditure. Meanwhile, the government got assent of the president to spend an additional amount of `3.73 lakh crore through supplementary demand for grants. This is a concern on the front of the fiscal deficit. The tax revenue gains will be nullified by the expected failure to achieve the target of the disinvestment, failure of monetisation of assets and supplementary demand. The size of the fiscal deficit will be widened, as per ICRA, by `1.53 lakh crore. The rating agency ICRA expects the fiscal deficit to print at `16.6 lakh crore — 7.1 per cent of the GDP, against the budget estimate of `15.07 lakh crore. Though, we still have two and half months to gear-up the disinvestment process and increase disinvestment proceeds. It will not only help to keep the fiscal deficit at expected level, it will also provide a fiscal consolidation path for financial year 22-23.

(The writer is the co-author of ‘Indirect Tax Reform in India’ and teaches at Institute of Technology & Science, Ghaziabad. The views expressed are personal.)

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