How weaker tax collections in November will impact Govt’s finances

How weaker tax collections in November will impact Govt’s finances

A few days ago, the Controller General of Accounts (CGA) released data on government finances for the month of November. As per the data, the Centre’s gross tax collections, which had grown by 22.3 per cent in the first quarter of the year, slowing down thereafter to 13.6 per cent in the second quarter, have grown by just 8.6 per cent during October-November. In November, tax collections were actually lower than the previous year.

The slowdown in November has been due to lower corporate tax and Union excise collections. The former has dragged down the growth in direct tax collections to just 2 per cent in November, while the latter has pulled down indirect tax collections to levels below those seen in the previous year.

What do weaker tax collections in November imply for Union government finances for the full year?

At the end of November, the Centre’s gross tax collections had touched almost two-thirds of the budgeted target for the year. And even as collections slowed down in November, analysts still expect tax revenues to exceed budgeted collections by a sizeable margin.

As per ICRA’s estimates, gross tax revenues will exceed budget targets by more than Rs 3 lakh crore. This would imply that the Union budget had been rather conservative in its assessment of revenues this year.

Will higher revenues lead to greater transfers to states?

State governments receive a share of the Union government’s tax collections based on the recommendations of the Finance Commission.

In the 2022-23 Union budget, based on its rather conservative projections for tax revenues, the Centre had pegged the tax devolution to states at Rs 8.16 lakh crore. However, with tax collections exceeding the Centre’s revenue projections by a significant margin, states too will see an increase in their share.

In fact, the Union government has already increased the transfers to states — in the months of August and November it doubled the quantum of transfers to state governments.

Has the central government also seen an increase in its expenditure?

Data from CGA shows that the Centre’s expenditure rose by a robust 21 per cent in the month of November, with a sharp rise observed in capital spending. In fact, capital expenditure by the Centre is up almost 63 per cent in the first eight months (April-November) of the financial year. The central government is also witnessing a significant expansion in its spending on account of expenditure on food and fertiliser subsidies.

As per a report by Kotak Economic Research, the expenditure on subsidies will push spending by around Rs 2.5 lakh crore.

So what will be the impact on the government’s fiscal deficit of the year?

While higher than budgeted revenues will help offset a large part of the increase in government spending this year, they will not be enough to compensate for the slippage. But, as the Union Budget is also likely to have underestimated how fast the economy is growing (in nominal terms), most analysts do not expect the fiscal deficit as a percentage of GDP to witness a major slippage this year.

Thus, as per analysts, the central government is as of now broadly in line to meet its fiscal deficit target of 6.4 per cent for the year.

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