'Quite Confident' Of Meeting 6.8% Fiscal Deficit Aim, Says India's Chief Economic Adviser
India's Chief Economic Adviser is "quite confident" that the central government will meet the fiscal deficit target set for the current year on better-than-expected revenues.
The government has budgeted for a fiscal deficit of 6.8% of GDP in FY22, although economists see a risk of slippage due to a recent resumption of food transfers. These transfers were estimated to cost the exchequer around Rs 93,000 crore.
Subramanian, however, believes the target can be met.
"We should be sticking to the 6.8% target that we have laid (down), because the revenue situation is looking much better," Subramanian told BloombergQuint in an interview.
For the April-May 2021 period, the government's fiscal deficit stood at Rs 1.23 lakh crore, or 8.2% of the budget estimate. Last year, the fiscal deficit for the two months was at 59.6% of the budget estimate. Higher tax and non-tax revenue helped improve government finances in the first two months of the year.
The government's net tax revenue of Rs 2.33 lakh crore collected during the first two months of the fiscal was 15.1% of the budget estimate. Even in a pre-pandemic year like FY20 and FY19, net tax revenue collected in the April-June period was just about 6.8-6.9% of the budget goal.
While tax collections are likely to slow temporarily due to the second wave, Subramanian expects a pick-up thereafter.
(For) GST, actually we expect the average that prevailed from September to March to be obtained again. Similarly, if you look at advance tax collections on the corporate side as well, they are looking good. So, the extra expenditure that has been done now as part of the new stimulus measures was actually keeping in mind (the fact) that the revenue situation is comfortable.Krishnamurthy Subramanian, Chief Economic Adviser, Government of India
Monthly goods and services tax collections stayed above Rs 1 lakh crore between October 2020 and April 2021. For May, however, collections fell below Rs 1 lakh crore as the second wave of Covid-19 infections stalled the nascent economic activity.
The government's revenue position has gained from higher excise collections on fuel.
Central excise duty collections on petroleum products rose by nearly 1.5 times to Rs 3.45 lakh crore in the last three years, according to a written reply by Rameshwar Teli, minister of state in Ministry of Petroleum and Natural Gas, in the Lok Sabha.
Given that inflation has risen to above the central bank's comfort band of 4(+/-2)%, economists, and even the Reserve Bank of India, have called for supply side measures, including a rationalisation of fuel taxes.
Subramanian countered this and said that the weight of petrol and diesel in CPI basket is minimal.
The weight of petrol and diesel in CPI basket is about 2.5%. Even if you take into account second round effects, the first and second round effects are of similar magnitudes so that’s the weight of petrol and diesel in the CPI Basket. In contrast food inflation has about 50% weight. You can see which is the biggest contributor. I always like going by facts and the facts are clear.Krishnamurthy Subramanian, Chief Economic Adviser, Government of India
As on Wednesday, the price of petrol in Delhi stood at Rs 101.84 per litre while that of diesel was at Rs 89.87. In Mumbai, petrol currently costs Rs 107.83, while diesel is at Rs 97.45, data available on Indian Oil Corporation’s website showed.
According to Subramanian, with restrictions imposed during the second wave easing, inflation should ease.
"While for two months the inflation print has come higher than 6%, sequential momentum has moderated in this month and core inflation seems to be down," he said. "I do anticipate that the inflation numbers actually should be within the range. As the restrictions decrease, I think we should see overall inflation being range-bound."
Retail inflation stayed above 6% for the second straight month, led by costs of food and fuel. Consumer Price Index inflation stood at 6.26% in June 2021 compared to 6.3% in May.
Relief: Credit Over Cash
The central government has faced criticism over its decision to provide economic support mostly via credit guarantee schemes rather than cash.
Defending this stance, Subramanian said that fiscal support provided after the global financial crisis had not led to a "multiplier" effect as it was not properly targeted at those who were distressed.
In contrast, when relief is designed via a loan combined with a credit guarantee, it effectively becomes a quasi-cash transfer but only for those who are genuinely stressed, he said. "Therefore bang for the taxpayer’s buck is maximised."
I want to highlight the contrast between the profligate and wasteful way in which the fiscal spending was done after the global financial crisis vis-a-vis the careful way in which the spending has been done during this crisis. This programme was clearly designed to help the urban poor.Krishnamurthy Subramanian, Chief Economic Adviser, Government of India
Subramanian said that he is not in favour of an urban jobs guarantee scheme, which a number of economists have suggested.
Urban employment, unlike rural employment, is not seasonal, he argued. Also, urban employment requires a variety of skills and designing a single wage rate is not easy.
"Finally, if you have to do an urban work fare programme you will have to keep the wages higher for urban areas than rural areas because the cost of living is higher, which will then lead to more migration to urban areas thereby exacerbating the problem," Subramanian said.
He went on to say that the Mahatma Gandhi National Rural Employment Guarantee scheme, in normal times, "is extremely inefficient."
When you create permanent entitlements, whether it is through a MGNREGA or a National Food Security Act, that leads to the taxpayers' money not being well-spent. And, as I said, one of the key fiduciary duties of economic policymakers is to treat the taxpayers’ money with the same respect, possibly more respect, than his or her own. That is basically what we have done as part of these targeted interventions.Krishnamurthy Subramanian, Chief Economic Adviser, Government of India