For several years, Modi – Government has faced high fiscal deficit (FD) – excess of its total expenditure over total revenue. While, an unusually high FD of 9.5% of gross domestic product (GDP) during 2020-21 as per revised estimate (RE) is attributed to the devastating effect of Corona pandemic on economic activity, even during the earlier years viz. 2017-18/2018-19/2019-20 which were free from such an aberration, the FD was in the 5.5% – 6% range (these numbers capture the effect of off-budget liabilities unlike the official figures which don’t) – significantly higher than the targets set for the years.
This in turn, is because in respect of both the expenditure and the revenue, the government of the day never lived up to what it promised. Let us look at a few examples. In 1991-92, the then Narasimha Rao Government declared its commitment to elimination of fertilizer subsidy (a major item of expenditure) within 3 years. Yet, this subsidy continued to increase even after 1993-94.
In 2000, the Expenditure Reforms Commission (ERC) had recommended implementation of a phased plan starting 2001-02 for removal of fertilizer subsidy in 5 years i.e. by 2005-06 when it would be given (albeit directly) only to small and marginal farmers. Yet, forget removal, the payments continued to gallop and crossed even the Rs 100,000 crore mark in 2008-09.
In 2014, the then Finance Minister (FM), Arun Jaitely had promised reduction of three major subsidies viz. food, fertilizers and fuel to 2% of GDP during 2014-15, 1.7% during 2015-16 and 1.6% during 2016-17. Yet, these subsidies have ballooned to unconscionably high level. During 2020-21, the Centre spent a mammoth Rs 674,000 crore on these subsidies (food: Rs 500,000 crore; fertilizers: Rs 134,000 crore; fuel: Rs 40,000 crore). This translates to about 3.5% of GDP which is more than two times the target set by Jaitely for 2016-17. A big slice of these payments included (i) subsidies given to millions of non-deserving; (ii) diversion of subsidized food and fertilizers; (iii) inflated payments to agencies such as the Food Corporation of India (FCI) towards reimbursement of handling and distribution expenses.
Coming to revenue, an overwhelming source is taxes. During 2020-21, the total direct tax collection (net of refunds) by the Union Government was around Rs 930,000 crore – corporate income tax (CIT): Rs 457,000 crore and personal income tax (PIT): Rs 471,000 crore. This comes to a mere 4.7% of the GDP at current prices (Rs 19500,000 crore) with CIT and PIT accounting for about 2.35% each.
In the PIT segment, over 60% of the declared income is by the ‘salaried class’ (there is no way, an earner can hide his/her income); it is abundantly clear that a large chunk of the income generated by earners – mostly in the unorganized sector – goes untracked. The return of cash payments after a brief lull post-demonetization (November 2016) with vengeance has only aggravated such evasion.
Besides, even for those who declare their income, a number of exemptions help them pay very little or no tax at all. In the corporate sector also, a plethora of exemptions and deductions hamper CIT collection; several companies have managed to reduce their effective tax incidence to as low as 20% – against the prevailing rate of 34.9% (basic rate 30% plus surcharge and education cess). The Government has also taken a big hit on account of the steep reduction in the tax rate, it offered to ‘new entities’ in the manufacturing sector from the existing 25% to 15%. The cut (announced on September 20, 2019) entails a loss of about Rs 150,000 crore annually.
As for indirect taxes, during 2020-21, the Union collected Rs 1064,000 crore from this source which works out to about 5.5% of the GDP. Higher collection from indirect taxes is not a good thing as these affect all sections of the society ‘uniformly’ including majority of the poor (unlike direct tax which is levied on the income of a person and is ‘progressive’ implying that someone earning more pays more tax). Even worse, a big slice of the revenue under this head comes from levy of Central Excise Duty (CED) on petrol and diesel.
During 2020-21, Centre’s collection from CED – including Road and Infrastructure Cess (RaIC) – on these two fuels alone was Rs 390,000 crore or 37% of its total indirect tax revenue. Being an integral part of daily use/consumption of every individual, high tax on these fuels (CED plus VAT account for more than 50% of the retail price of petrol which is currently > Rs 100 per litre in several states) not only make a deep hole in their pocket but also, increase the cost of administering welfare schemes such subsidized food or free ration for the poor – a typical case of ‘’give with one hand, take with the other‘
If, mandarins in the finance ministry feel that revenue from fuel taxes is helping the Government fund development of infrastructure and a host of welfare schemes, they also need to look at the rising subsidy payments on food, fertilizers and fuels to unsustainable levels (Rs 674,000 crore during 2020-21) – a good portion of this being due to none other than high fuel taxes.
As for the Goods and Services Tax (GST), – after an initial period to allow the system to stabilize – collections under this head were expected to show buoyancy primarily on the strength of (i) triggering accelerated growth and (ii) capturing and taxing millions of transactions which were going un-captured and untaxed under the dispensation prior to July 1, 2017. But, these have languished. During 2020-21, the next tax collection of the Centre (Central GST plus Integrated GST plus Compensation Cess) was Rs 548,000 crore; even during 2019-20 (prior to pandemic), the collection was Rs 599,000 crore.
A lot of potential under (ii) is yet to be realized notwithstanding several measures such as generation of e-way bills, electronic invoices, use of Radio Frequency Identification (RFID) Tags etc taken by the Government to plug the leakages.
Moreover, the decision of the GST Council to exempt businesses with annual turnover < Rs 40 lakh from payment of tax, allowing trader/manufacturer with turnover < Rs 1.5 crore to opt for ‘composition scheme’ (CS) and pay tax at 1% and service providers with turnover < Rs 50 lakh pay tax at 6% under CS has seriously compromised revenue. (nearly 75% of registered entities having turnover < Rs 1 crore contribute a miniscule 6.5% of the total tax revenue).
Given the way, the Government executes its spending and revenue plans with scant regard for efficiency and accountability, it is unlikely that it will ever succeed in getting out of the current situation of persisting imbalance between revenue receipts and expenditure.
It could possibly return to fiscal consolidation road map if only it (a) carries out long pending reform of major subsidies; (b) reform direct tax regime with emphasis on doing away with exemptions/deductions and plug leakages; (c) increase efficiency of GST administration and bring petrol, diesel, crude oil and natural gas under its purview.
Action on (a), (b) and (c) has to be concurrent especially keeping in mind huge loss of revenue from fuel levies under GST which need to be more than offset by increasing tax buoyancy and trimming subsidy payments.