India’s fiscal numbers for March 2021, and thus for the whole of FY21, were reported yesterday. It confirmed to the expectations of a much higher outflow towards food subsidy and higher tax collections in Q4 than that envisaged in the budget presented on 01st February. This opens up some space as the year-on-year budgeted revenue growth numbers for FY22 now turn out to be lower vs. FY21 actuals.
In this note, we look at the details of the food-subsidy cleanup, the extent of the space that has opened up for FY22 and thus the scope for any fiscal policy response to the pandemic in the year ahead.
The subsidy cleanup
Food subsidy to the FCI, from FY17, was being partly directly funded by the central government (part of fiscal deficit) and also externally using NSSF inflows (not part of fiscal deficit). Until end-FY20, total net NSSF funding had grown to Rs. 2.55 lakh crore (38% of total subsidy funding during the period). In February this year, as mentioned in our budget-day note (click here), the government decided to discontinue this practice and pay the FCI to allow it to repay most of its loans to NSSF in FY21. Separately, the additional food-subsidy outflow in FY21 from the food grain distribution program announced by the government was Rs. 1.03 lakh crore. Together, these increased FY21 on-budget food subsidy by Rs. 3.07 lakh crore from BE to RE. In March, from FCI accounts, it became clear the government fully repaid outstanding NSSF loans, even the repayment budgeted for subsequent years. Thus, FY21 on-budget food subsidy was Rs. 1.16 lakh crore in BE, Rs. 4.23 lakh crore in RE and Rs. 5.25 lakh crore in provisional actuals. Additionally, FY21 fertilizer subsidy increased by Rs. 62,000cr from BE to RE, and the final outflow was close to RE.
So, the government’s decision to do this one-time clean-up of the food subsidy system accounted for 1.5% of GDP in the reported fiscal deficit. It also makes more NSSF-inflows available towards funding the fiscal deficit.
Figure 1: Central government fiscal math – better FY21 revenue opens up some flexibility for FY22
More headroom
As evident from table above, tax revenue realized in FY21 was higher than the revised estimate which had conservative in-built estimates for the March quarter. From Jan21 to Mar21, gross tax collection overshot implied revised estimate by Rs. 1.25 lakh crore (excise duties by Rs. 29,000cr, customs by Rs. 23,000cr, central GST by Rs. 25,000cr and direct taxes by Rs. 21,000cr). Net tax revenue was Rs. 80,000cr higher as devolution to states was Rs. 45,000cr higher. Further, the Mar21 quarter gross tax collection was higher than that during the same period in recent years, some part of it admittedly due to the manifestation of pent-up demand.
As a result, net tax revenue in FY21 grew 4.9% y/y, when nominal GDP contracted 3%. The FY22 budgeted y/y tax growth falls from 14.9% to 8.5%, with the reduction being broad-based across tax categories and nominal GDP growth is likely to be at least 13% y/y as of now. Given the higher revenue expenditure this year, budgeted y/y growth for FY22 is lower. All this opens up some headroom for fiscal policy. The ~Rs. 50,000cr higher RBI dividend and the increase in GST collections attributed to stronger compliance provide further cushion. This is not overlooking the impact of the second wave, possibility of another one or the high disinvestment target but to highlight the space which has now opened up, ceteris paribus, for some discretionary fiscal stimulus without getting materially off-track from the envisaged fiscal glide path (6.8% of GDP for FY22). Of course, a final view on this may be taken only much later during the year depending upon the evolution of the pandemic which may decide the hit to revenues as well as define the total fiscal response.
The government had stressed, in the budget, on the need for capex-led growth although we had highlighted the details imply a lower growth impulse (click here). Any hurdles in the implementation of capital projects, due to the pandemic and perceived health risks, is also possible. In the meantime, some amount of revenue-expenditure-support would also be needed given the impact of the two waves on households, higher health expenditure this time, more rural infections vs. first wave, perceived health risks, progress in vaccination, etc. (the food grain distribution program has already been relaunched for May-June). Aiding domestic demand to move the other wheels of the economy, investment and lending, and thus drive growth is paramount (click here). How the government utilises the fiscal headroom available for this, amidst the tradeoffs and uncertainties, is to be seen.
Abbreviations: FCI – Food Corporation of India, NSSF – National Small Saving Fund, GDP – Gross Domestic Product, GST – Goods and Services Tax, RBI – Reserve Bank of India
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