India’s Chief Economic Adviser is “fairly confident” that the central government will hit the budget deficit set for the current year with better than expected revenues.
The government has projected a budget deficit of 6.8% of GDP in FY22, although economists see a risk of slipping with the recent resumption of food transfers. These transfers were estimated to cost the Treasury around Rs 93,000 crore.
However, Subramanian believes that the goal can be achieved.
“We should stick to the (fixed) target of 6.8% that we have set, because the sales situation looks much better,” Subramanian told BloombergQuint in an interview.
For the April-May 2021 period, the government’s budget deficit was Rs 1.23 lakh crore, or 8.2% of the budget estimate. Last year the budget deficit for the two months was 59.6% of the budget estimate. Higher tax and non-tax revenues contributed to the improvement in public finances in the first two months of the year.
The government’s net tax revenue of Rs 2.33 lakh crore collected in the first two months of the fiscal year was 15.1% of the budget estimate. Even in a year before the pandemic like FY20 and FY19, the net tax revenue collected during the April-June period was only around 6.8-6.9% of the budget target.
While tax collection is expected to slow temporarily due to the second wave, Subramanian expects an upturn thereafter.
Monthly tax collections for goods and services stayed above Rs 1 lakh crore between October 2020 and April 2021. However, in May, counts fell below Rs 1 lakh crore as the second wave of Covid-19 infections stalled emerging economic activity.
The government’s revenue position has improved with higher fuel excise levies.
According to a written response from Rameshwar Teli, Minister of State at the Lok Sabha Ministry of Petroleum and Natural Gas, central consumption tax levies on petroleum products have increased almost 1.5 times to 3.45 lakh crore in the past three years.
Given that inflation has risen above the central bank’s comfort band of 4 (+/- 2)%, economists and even the Reserve Bank of India have called for supply-side action, including a rationalization of fuel taxes.
Subramanian countered this, saying that the weight of gasoline and diesel in the CPI basket is minimal.
As on Wednesday, the price of gasoline in Delhi was 101.84 rupees per liter, while the diesel price was 89.87 rupees. In Mumbai, gasoline currently costs Rs 107.83 while diesel costs Rs 97.45, data on the Indian Oil Corporation website showed.
Subramanian said inflation should ease with the restrictions imposed during the second wave of easing.
“While inflationary pressures have been above 6% for the past two months, sequential dynamics have weakened this month and core inflation appears to have fallen,” he said. “My assumption is that inflation numbers should actually be within the range. When the constraints wear off, I think we should move headline inflation within the range.”
Retail inflation stayed above 6% for the second straight month, led by food and fuel costs. Consumer price index inflation was 6.26% in June 2021, compared to 6.3% in May.
The central government has been criticized for its decision to provide economic assistance mainly through loan guarantee systems rather than cash.
Subramanian defended this stance, saying that the fiscal support granted after the global financial crisis did not result in a “multiplier effect” as it was not properly targeted to those in need.
If, on the other hand, relief is designed through a loan combined with a loan guarantee, it practically becomes a quasi-cash transfer, but only for those who are really stressed out, he said. “Hence, the taxpayer’s money is maximized.”
Subramanian said he was not in favor of an urban job guarantee program proposed by several economists.
Urban employment, unlike rural employment, is not seasonal, he argued. In addition, urban employment requires a multitude of skills and the development of a uniform wage rate is not easy.
“Eventually, if you have to run an urban labor plan, you have to keep wages higher for urban areas than rural areas because the cost of living is higher, which then leads to more urban migration and exacerbates the problem,” Subramanian said.
He went on to say that the Mahatma Gandhi National Rural Employment Guarantee program is “extremely inefficient” in normal times.