Record tax collection will help absorb bulk of additional subsidies: India Tracker explainer

By: Anshul Vipat

The government, however, requires a bigger headroom than this considering its mounting subsidy burden

According to experts, these two are the rare instances of such tax buoyancy in the last two and a half decades. Net tax revenues are expected to overshoot the budget estimate by a robust Rs 2 trillion. These additional tax revenues would enable the government to comfortably absorb bulk of the additional expenditure it is likely to incur on subsidies and MGNREGS this year.

Increase in government earnings

The government had budgeted for a modest 9.6 percent increase in both, gross tax collections and net tax revenues for 2022-23 over the revised estimates for 2021-22. As the data above suggests, this is set to overshoot its target. This was backed by better-than-expected growth in income tax, corporation tax and goods & services tax (GST). Gross collections of Corporation tax and GST are also projected to overshoot the budget estimates by Rs.860 billion each.

Besides, the government partially made up for the loss of revenue from excise rate cuts on petrol and diesel, announced in May 2022, by imposing windfall tax on crude oil production and special duties on exports of petroleum fuels with effect from July 1, 2022. Earlier during the year, it had hiked the duty on iron & steel exports and gold imports.

Its tax collections during 2021-22 turned out to be about three percent higher than the revised estimates, thereby yielding a broader base than what the Union Budget had considered.

Will help overshadow subsidy concerns

As per CMIE estimates, total government earnings would touch Rs.24.4 trillion in 2022-23 as compared to the budgeted Rs.22.8 trillion. This provides a fiscal headroom of about Rs.1.6 trillion. The government, however, requires a bigger headroom than this considering its mounting subsidy burden.

The mounting subsidy burden

The government had budgeted for subsidies of Rs.3.56 trillion for 2022-23. However, the finance ministry in May declared an additional fertiliser subsidy of Rs 1.10 lakh crore for the present year. Then, Rs.200 billion was given to compensate state-run oil marketing companies (OMCs) for under-recoveries on sale of subsidised LPG. This was followed by extension of the free foodgrain distribution programme PM-GKAY till December 2022 which had an outlay of Rs.1.25 trillion. This despite the finance ministry red flagging the extension considering the growing fiscal deficit.

All these  factors have pushed up the annual subsidy requirement for 2022-23 by Rs.2.25 trillion to Rs.5.81 trillion, after accounting for the savings made on lower wheat procurement during the Rabi season.

As the above data suggests, the government's subsidy burden has ballooned in recent years. The combined food and fertiliser subsidy bill in the revised estimates for 2020-21 was a massive Rs 556,565 crore, representing 16.1 percent of the Centre’s entire Budget. For the 2021-22 fiscal, the subsidy amount was Rs 4,33,108 crore. Although this was lower than 2020-21 spending, but it was still higher than the pre-pandemic era.

Although this was lower than 2020-21 spending, but it was still higher than the pre-pandemic era. Before the pandemic, we can see a small but continuous decline in Centre’s spending on food and fertiliser subsidy. For instance, between 2015-16 and 2019-20, the aggregate outlay on the two fell, both in absolute terms (from Rs 211,834 crore to Rs 189,813 crore) as well as share of the Centre’s total expenditure (from 11.8% to 7.1%). A further drop was estimated in the budget for 2020-21. Unfortunately, the COVID-19 pandemic washed out the projection.

Despite record government earnings, fiscal deficit is set to overshoot the budget target. Financing this deficit will not be a headache for the government considering has adequate cash balances with the RBI to cover the additional deficit. However, the increasing deficit should definitely worry the government.