In last year’s budget, the Center’s net tax revenue growth in FY22 was expected to grow by 8.5 percent. Today, in the revised estimates for FY22, the budget indicates that tax revenues are likely to grow by 24 percent.
Budget of Indian Union: Minister of Finance Nirmala Sitharaman with her budget tablet. AFP
Finance Minister Nirmala Sitharaman’s budget is clearly focused on growth driven by capital, even if it comes at the expense of a higher deficit. But what is surprising is that the FM could go for growth, even without explaining a major fiscal deficit. This is because the Budget seriously underestimates the tax revenue for the second year in a row.
The budget itself acknowledges some of the underestimation. In last year’s budget, the growth of the Center’s net tax revenue in the current year – FY22 – is expected to grow by 8.5 percent to Rs 15.45 trillion. Today, in the revised estimates for FY22, the budget indicates that tax revenue is likely to grow by 24 percent to Rs 17.65 trillion.
Now even this is an underestimation, and here’s the reason: for the period April-December, the Center’s net tax revenue is at Rs 14.74 trillion, 50 percent up from Rs 9.6 trillion in the same period in 2020. Now, for Jan. -March 2021, the government collects net tax revenue of Rs 4.6 trillion. Even assuming that the government collects the same amount in January-March of 2022, the net tax revenue to the Center in the current year will be Rs 19.5 trillion and not 17.65 trillion as mentioned in the revised estimates. And if tax revenues grow at the same rate in January-March as in the first nine months, net tax revenues this year could easily exceed Rs 20 trillion, which means a good Rs 3 trillion more than the revised estimates!
If the net tax revenue of FY22 is Rs 3 trillion higher, it is logical that the net tax revenue of next year may also be at least Rs 5 trillion more due to the base. Indeed, the government has assumed a net growth of tax revenue of 9.6 percent.
Yes, next year, government revenue could be affected by the cut in fuel taxes. But if corporate and income taxes and GST were to grow at 1.3-1.4 times nominal GDP (which is seen to grow by 13 percent), then next year’s net tax revenue could easily grow by 15 percent. This means that next year’s net tax revenue is underestimated by at least Rs 4 trillion.
At the press conference, the Minister of Finance and the main secretaries claim that they are realistic. The FM added that she prefers to be a bit conservative and over-performing. Now, an estimate of revenue with Rs 4 trillion or by 25 percent is not conservative but just harmful.
By lowering the tax returns, the government has probably overestimated the deficit. It has calculated the fiscal deficit at Rs 16.65 trillion against market expectations of Rs 15.5 trillion.
Similarly, the government’s market loan is estimated at Rs 14.3 trillion, against market estimates of Rs 12 billion at its highest. The ghost of the government, which sells nearly 35,000 crore rupees to bonds every week since April, has scared the bond market, and 10-year bond yields have risen from 6.68 percent for budget to 6, 85 percent post-budget presentation.
This will only increase the cost of borrowing for the government and indeed for the whole economy, as corporate loans will be priced around 30-50 basis points above government bonds. The market hoped that there would be some announcement to include Indian bonds in the global indices, but that was revealed at the press conference by the Secretary of Revenue Tarun Bajaj.
Some more bizarre questions remain
Last year’s tax returns were used up in recognition of the Government’s taxes on the Food Company. This year, some of the excess collections are being used to pay Air India fees. The market is now worried that the likely higher than expected tax collections of next year will also be used to correct some unrecognized fees.
In short, the Ministry of Finance would do well to explain the reason behind its ongoing underestimation of taxes. Why do they not recognize a clear increase in India’s tax-to-GDP ratio? Do they know what the market does not know? Or if it’s just conservatism, are they not afraid that the government and the economy will pay the price for this unjust conservatism?