Govt finances showing marked improvement in H1: RBI paper

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Government finances, both of the Centre and states, have shown remarkable resilience during the first half of the current fiscal, with tax mop-up surpassing expectations by a wide margin and expenditure remaining broadly in line with Budget estimates despite higher pandemic-related spending, says the December issue of the RBI bulletin.

The paper, by the central bank’s house economists, also notes a “marked improvement in the quality of expenditure” for both the Centre and states, which bodes well for a durable growth revival.

The Centre’s direct tax collections soared 83.7 per cent in H1, led by growth in income tax and corporate tax at 64.7 per cent and 105.1 per cent, respectively, on the back of strong corporate performance, says the paper.

The Centre’s indirect tax collection also increased in H1, led by a more than 100 per cent jump in customs duty collection and higher crude oil prices and on the back of improving trade activity and higher import demand.

Union excise duty collection too rose 33.3 per cent over FY21 and 79 per cent over FY20 due to the higher duties levied in March and May 2020 to mobilise additional revenue as a pandemic-induced emergency measure.

GST collections also increased in H1 by 50.1 per cent and 12.5 per cent over FY21 and FY20 levels, respectively.

GST revenue had taken a hit in May-June due to pandemic-related restrictions but recovered quickly thereafter, in line with the economic recovery and on account of steps taken by the tax administration to plug evasion and ease the compliance burden.

November 2021 GST collection was the second highest till date at Rs 1.32 lakh crore, up 25.3 per cent.

This has had around three-fifths of the budgeted GST compensation cess collections of Rs 1 lakh crore being realised between April and October.

The Centre has also transferred the entire amount of Rs 1.59 lakh crore that was to be released to the states this fiscal under the back-to-back loan facility in lieu of GST compensation cess. The front-loading has been done to enable states to plan their expenditure effectively.

Going forward, the general government fiscal deficit, which remained subdued in H1, allows space for a pick-up in expenditure in H2 to support and sustain the recovery in growth, it noted.

The Budget envisaged a consolidation of the fiscal deficit from 9.5 per cent in FY21 to 6.8 per cent in FY22. States also budgeted for consolidation in their fiscal deficits from 4.7 per cent of GSDP in FY21 to 3.7 per cent in FY22.

The second wave in April-May this year turned out to be more severe in terms of loss of human lives, but the impact on economic activity was contained through localised lockdowns and also better adaptation to live with the virus, the bulletin said.

“Government finances showed remarkable resilience and buoyancy, and as a result, despite additional expenditure burden imposed by the second wave, government spending has broadly remained in line with the budget estimates.

“Thrust on capex has resulted in a significant improvement in the quality of expenditure, a necessary condition for pro-growth fiscal consolidation in the medium-term,” it said.

From the revenue side, both the Centre’s as well as states’ tax collections surpassed expectations, with all major tax heads recording robust growth in the first half.

They have reached their pre-pandemic levels in H1 with states collecting 46.9 per cent of their budgeted receipts already, which is higher than the corresponding figures for the past three years.

States’ spending was 37.8 per cent of the budgeted target, broadly in line with the average during the pre-pandemic years.

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