Number theory: what to expect fiscally in the budget?
There is a broad consensus among independent economists that the government should avoid harsh fiscal consolidation in the upcoming budget. Yet, while the government can always choose to budget for a higher budget deficit, revenue growth is essential for it to undertake larger spending commitments in the following fiscal year.
Revenue budget projections for the coming year are almost always based on collections from the previous year. The 2022-23 budget, which will be presented on February 1, will also provide revised estimates (RE) of tax revenue for the 2021-22 fiscal year. What can we expect in the RE numbers and what do they mean for next year’s fiscal projections? Here are four charts that put that into perspective.
RE numbers for 2021-22 will most likely exceed the 2021-22 budget estimate (BE) for tax collection
Tax revenues are essentially a function of two factors: nominal GDP growth and fiscal dynamism. Nominal GDP provides the basis for taxes. Tax buoyancy is defined as the growth in tax collection per unit increase in income. All other things being constant, fiscal dynamism can increase with an increase in tax rates or a reduction in tax evasion. The 2021-22 budget projected nominal GDP growth of 14.4%. According to the first advanced GDP estimates for 2021-22, nominal GDP growth is expected to be significantly higher at 17.57%. This means that even if the fiscal dynamism assumed in the 2021-22 budget were to remain unchanged, tax revenues should be higher than the BE projections. RE figures for gross tax receipts exceeding BE figures, should it happen this year, will be a first since 2017-18.
See Chart 1: Recoveries of RE and Real Gross Tax Revenue as a Share of BE
The jury is still out on the allocation of direct and indirect taxes to gross tax revenue
A government’s fiscal policy is not independent of distribution. Union government taxes include both direct taxes (mainly income tax and corporation tax) and indirect taxes (goods and services tax, excise tax from the Union and customs duties). The first is considered to be progressive in nature; it is mainly levied on the wealthy and tax rates rise as incomes rise. Indirect taxes, on the other hand, are regressive in nature. Tax rates are the same regardless of the economic status of the consumer and because they are levied on consumption, the poor face a higher effective tax. Indeed, the poor consume a greater share of their income than the rich, which economists describe in terms of the marginal propensity to consume.
India’s tax basket has taken a regressive turn of late, and this trend has worsened during the pandemic, largely due to the sharp increase in Union excise duty collections on consumption. gasoline and diesel. An HT analysis in March 2021 used data from a survey commissioned by the Ministry of Petroleum to show that the poor consume a higher share of gasoline and diesel than the rich in India. The BE figures for the 2021-22 budget put the share of direct and indirect taxes in gross tax revenue at 50% and 50% respectively. While this is an improvement over the 46-54 distribution in 2020-21, it was worse than the 2019-20 distribution of 52-48. It will be interesting to see what this number is for numbers 2021-22 RE and 2022-23 BE.
See Graph 2: Share of direct and indirect taxes
Will states benefit from improved revenue collection?
Tensions on the fiscal federalism front have grown in India in recent years. The greatest manifestation of this fact is the states’ declining share of the Center’s gross tax revenue. India’s constitutional framework provides a formula based on a Finance Commission – a body constituted every five years – for the distribution of taxes between the Center and the States. The 15th Finance Committee set the states’ share of central taxes at 41%. The actual transfer from the center to the states was significantly lower; it was only 29% in 2020-21. This discrepancy is due to the fact that the center increasingly transfers a large part of its taxes to the special category of cess which is not included in the divisible pool of taxes governed by the decisions of the finance commission. The 2021-22 budget sets the states’ share of the Centre’s gross tax revenue at 30%. It remains to be seen what this number is for the figures 2021-22 RE and 2022-23 BE. If this share does not increase significantly, it can be said that the states have not benefited from the probably higher than expected performance of the center’s revenues.
See Graph 3: Share of the Center and the States in gross tax revenue
Provisional tax figures from the Comptroller General of Accounts (CGA) of the Ministry of Finance show that while the gross tax receipts collected up to November 2021 (latest figures available) were 50% higher than the figures for the previous year, the amount of state taxes was only 20% higher than last year. If these trends continue, there is reason to believe that states’ gains on the revenue front will be less than commensurate with the Center’s overall revenue gains this year.
See Chart 4: Main tax heads until November 2021 as a percentage of November 2020 values