The Central Government’s first quarter performance shows that it is well on track to spend the entire budgeted expenditure for 2022-23 without deviating from its fiscal target.
The government spent Rs.9.5 trillion, or 24 per cent of its annual budgeted expenditure during April-June 2022. This was 15.4 per cent higher than the expenditure incurred during the corresponding period a year ago. It stepped up capital expenditure by a robust 57 per cent to Rs.1.8 trillion. A bulk of this was spent on roadways and railways. The government has budgeted for a record high capital expenditure of Rs.7.5 trillion for 2022-23.
The government utilised a fourth of its revenue expenditure budget for 2022-23 in the first quarter. At Rs.7.7 trillion, this was 8.8 per cent higher than in the same quarter of 2021-22. Expenditure on major subsidies declined steeply by 32.1 per cent to Rs.680 billion. On the other hand, interest payments increased by 24 per cent to Rs.2.3 trillion and revenue expenditure on all other counts rose by 11.9 per cent to Rs.4.8 trillion.
The sluggishness in subsidy disbursals is perplexing, particularly when the government’s annual subsidy burden for 2022-23 is slated to exceed the budgeted target of Rs.3.6 trillion by a huge margin.
In March 2022, the government extended the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) by six months till September 2022 at an additional cost of Rs.850 billion. In May 2022, it announced fertiliser subsidy of Rs.1.1 trillion, over and above the budgeted allocation of Rs.1.05 trillion for 2022-23.
The government has saved about Rs.760 billion this fiscal due to lower-than-targeted wheat procurement. But these savings are not adequate to offset the impact of additional fertiliser and food subsidy burden. Subsidy payments in 2022-23 are expected to top Rs.4.8 trillion. This means an overshooting of the target by Rs.1.25 trillion.
The government is in a position to absorb this additional subsidy burden owing to the buoyancy in its tax collections. It does not need to compromise on any of its major budgeted expenditures - revenue or capital.
The government mobilised net tax revenue of Rs.5.1 trillion in the June 2022 quarter. This was the highest tax revenue generated in the first quarter of any fiscal. It accounted for more than a fourth of the tax revenue target budgeted for 2022-23. This is extra-ordinary. Tax mop up is usually weak at the beginning of the fiscal. It gathers pace only in the second half.
Net tax collections grew smartly during the June 2022 quarter driven by a 40.7 per cent jump in income taxes and a 30 per cent surge in corporation taxes. Goods & services tax (GST) collections too increased by a robust 24.8 per cent. On the other hand, customs duties shrunk by 11.8 per cent and excise duties by 9.8 per cent due to rate cuts and exemptions offered to tame rising inflation.
Going forward, we expect the year-on-year growth in tax collections to slow down as the year-on-year growth in corporate profits and nominal GDP tapers. Despite this, income tax, corporation tax and GST collections during 2022-23 are expected to exceed their budget estimates.
The government is likely to forgo excise duty of Rs.1 trillion due to petrol and diesel rate cuts announced in May 2022. About Rs.700 billion of it will get compensated by the special additional excise duty of Rs.17,000 per tonne imposed in July 2022. Despite this, excise duty collections are expected to fall short of their 2022-23 target by Rs.300 billion.
We estimate total net tax collections in 2022-23 to come in at Rs.20.5 trillion, Rs.1.1 trillion higher than the budget estimate.
On the other hand, non-tax revenue is likely to fall short of the budget estimate of Rs.2.7 trillion by about Rs.400 billion due lower transfer of surplus by the Reserve Bank of India (RBI) this year. The government’s 5G spectrum auction has managed to garner better response than expected, with bids totalling over Rs.1.5 trillion by the 6th day of the auction. However, this is unlikely to yield much revenue to the government this year as the telcos have been allowed to stagger the payment over 20 years.
The government mobilised Rs.245.6 billion through disinvestment of its stake in LIC, ONGC, GAIL and PPL in the June 2022 quarter, thereby achieving 37.8 per cent of its disinvestment target for 2022-23. However, the way forward appears difficult due to poor market sentiments and legal challenges faced by some of the companies up for disinvestment. We fear that the government may fail to meet its disinvestment target this year too and suffer a shortfall of about Rs.250 billion in the proceeds.
The government has budgeted for Rs.16.6 trillion of gross fiscal deficit (GFD) for 2022-23. It has utilised only 21.2 per cent of this space so far. We expect its fiscal deficit to start rising once the government begins clearing its subsidy dues. The excess net tax revenue of Rs.1.1 trillion will not be able to fully cover the Rs.400 billion shortfall in non-tax revenue and the additional subsidy liability of Rs.1.25 trillion. Fiscal deficit during 2022-23 is likely to amount to Rs.17.4 trillion, nearly Rs.800 billion more than the budget estimate.
Yet, as a proportion of GDP, the deficit will be lower than the budgeted ratio of 6.4 per cent. The Union Budget has grossly under estimated India’s nominal GDP for 2022-23. It projects GDP to grow by 11 per cent, whereas we expect the growth to be much higher at 16.5 per cent in view of elevated inflation. Fiscal deficit-to-GDP ratio for 2022-23 will, therefore, be arrested at 6.3 per cent, despite the deficit overshooting its target in absolute terms.