Government Finances 2021-22: A Half-Yearly Review - RBI - Reserve Bank of India
Government Finances 2021-22: A Half-Yearly Review
Government finances exhibited remarkable resilience to the second wave, with tax collections surpassing expectations, and government expenditure remaining broadly in line with the budget estimates despite higher pandemic related spending. There has also been a marked improvement in the quality of expenditure for both Centre and States, which bodes well for a durable growth revival. Going forward, the general government fiscal deficit, which remained subdued in H1:2021-22, allows space for a pick-up in expenditure in the second half of the current fiscal year to support and sustain the recovery in growth. I. Introduction The Union Budget for 2021-22 was presented at a juncture when the economy was witnessing a robust stimulus-led recovery from the severest recession encountered after the first wave of the pandemic, but amid lingering uncertainty about the prospect of a second wave. Accordingly, the Budget pursued a delicate balancing act, sustaining support to a broad-based and durable economic revival while aiming for feasible degree of fiscal consolidation in a challenging macroeconomic environment. The Budget envisaged a consolidation of gross fiscal deficit (GFD) from 9.5 per cent of GDP in 2020-21 (RE) to 6.8 per cent in 2021-22 (BE).1 States also budgeted for consolidation in their GFD from 4.7 per cent of GDP in 2020-21 (RE) to 3.7 per cent in 2021-22 (BE). The second wave, later during April-May 2021 turned out to be more severe in terms of loss of human lives, but the impact on economic activity was contained through localised restrictions and also better adaptation to live with the virus. Government finances showed remarkable resilience and buoyancy, and as a result, despite the additional expenditure burden imposed by the second wave, government spending has broadly remained in line with the budget estimates. The government’s thrust on capex resulted in a significant improvement in the quality of expenditure - a necessary condition for pro-growth fiscal consolidation in the medium-term. Centre’s tax collections surpassed expectations on the receipts side, with all major tax heads recording robust growth in the first half of 2021-22. States’ tax collections also exhibited strong growth, though not at the same pace as for the Centre, and have reached their pre-pandemic levels in H1:2021-22. The rest of the article is structured as follows: Section II analyses the receipt and expenditure outcomes for the Centre and States (at a quarterly frequency) for H1:2021-22. Section III deals with the outcomes in terms of key deficit indicators and their financing. Section IV presents estimates on general government finances for Q1 and Q2:2021-22 along with projections for the second half of 2021-22. Section V sets out the concluding observations and the near-term fiscal outlook. II. Fiscal Outcomes in Q1 and Q2: 2021-22 Total receipts of the Central government registered a marked improvement over its trend level and total expenditure remained contained in H1:2021-22, despite additional expenditure necessitated by the second wave as the government took precautionary measures to curtail avoidable expenditure. State finances also recovered to their pre-pandemic level in H1:2021-22. States collected 46.9 per cent of their budgeted receipts which is higher than the corresponding figures for the past three years2. On the expenditure side, the H1:2021-22 outgo was 37.8 per cent of the budgeted target, broadly in line with the average during the pre-pandemic years (Chart 1). ![]() a. Receipts Revenue receipts of the Central government registered a robust growth in Q1:2021-223, as tax revenues recorded high buoyancy despite the second wave and non-tax revenues received a boost from higher than budgeted dividend transfer from the Reserve Bank. With a 35.0 per cent growth in revenue receipts in Q2, it clocked a high of 60.4 per cent of BE in H1 as a whole. Non-debt capital receipts4 also improved in H1:2021-22 vis-à-vis H1:2020-21 but fell short of 2019-20 levels (Chart 2 a and b). States’ revenue receipts have also remained resilient to the second wave of the pandemic, with overall revenue receipts recording a y-o-y growth of 33.7 per cent in Q1:2021-22 over the previous year and 9.3 per cent over the corresponding quarter of 2019-20. Similar performance was sustained in Q2:2021-22 with the y-o-y growth in revenue being significantly high at 21.4 per cent. Overall, States’ revenue receipts in H1:2021-22 were 26.7 per cent higher than those in H1:2020-21 (8.2 per cent over H1:2019-20). Non-debt capital receipts of States also recorded high growth in both Q1 and Q2 of 2021-22 albeit with considerable volatility (Chart 3). ![]() The Centre’s direct tax collections registered a y-o-y growth of 83.7 per cent in H1:2021-22, led by growth in income tax and corporation tax by 64.7 per cent and 105.1 per cent, respectively5, on the back of strong corporate performance. For States, stamp duties which account for more than 85 per cent of own direct tax revenues, more than doubled in Q1:2021-22; Q2 recorded a y-o-y growth of 53.4 per cent (Chart 4). The Centre’s indirect tax collections also increased during H1, led by a more than 100 per cent increase in customs duty collections on the back of improving trade activity and higher import demand. Union excise duty collections recorded an increase of 33.3 per cent over 2020-21 (79.0 per cent over 2019-20) during this period due to the higher duties levied last year (March and May 2020) to mobilise additional revenues as a pandemic induced emergency measure. ![]() ![]() GST collections (Centre plus States) increased in H1 by 50.1 per cent and 12.5 per cent over 2020-21 and 2019-20 levels, respectively. GST revenues had taken a hit in May-June due to pandemic-related restrictions but recovered quickly thereafter, in line with the economic recovery and on account of steps taken by the tax administration to plug evasion and ease the compliance burden. In November 2021, GST collections registered a y-o-y growth of 25.3 per cent6 to reach ₹1.32 lakh crore, the second-highest since the introduction of GST. Around three-fifth of the budgeted GST compensation cess collections of ₹1 lakh crore were realised during April-October. The Union government has also transferred the entire amount of ₹1.59 lakh crore that was to be released to States in 2021-22 under the back-to-back loan facility in lieu of GST compensation cess. The front-loading has been done to enable States to plan their expenditure effectively. States’ GST collections recorded a y-o-y growth of 71.6 per cent in Q1 and 27.3 per cent in Q2, 2021-22, with many States like Gujarat, Uttarakhand, Andhra Pradesh, Himachal Pradesh, Maharashtra and Punjab registering a y-o-y growth of over 50 per cent in H1:2021-22 over H1:2020-21 (Chart 5). Given the comfortable revenue position both on the direct and indirect tax front, the Centre partially rolled back in November, the hike in excise duty on petrol and diesel that were introduced during the first wave of the pandemic. States also followed suit by reducing their VAT rates on fuel (Box 1). Centre’s non-tax revenues also increased during H1:2021-22 due to higher than budgeted surplus transfers from the Reserve Bank (Chart 6). On the disinvestment front, only 5.2 per cent of the budgeted disinvestment target of ₹1.75 lakh crore has been raised in H1. The progress on the proposed sale of Air India has, however, provided an impetus to the disinvestment programme of the government. The Centre also aims to raise resources through asset monetisation. An aggregate monetisation potential of ₹6.0 lakh crore, over a four-year period, from 2021-22 to 2024-25, is estimated under the National Monetisation Pipeline, with an indicative value of ₹0.88 lakh crore envisaged for the current financial year. However, the actual realization will depend on the timing, transaction structuring, and investor interest. For States, non-tax revenues increased by 40.2 per cent and 53.1 per cent in Q1 and Q2 of 2021-22, respectively (compared to Q1 and Q2 of 2019-20 at 15.9 per cent and 20.6 per cent, respectively). ![]()
![]() Tax devolution to States witnessed a y-o-y decline of around 12 per cent for Q1:2021-22. As a per cent of States’ budget estimates, however, the transfers were broadly in line with those in 2020-21 and 2019-20. For Q2:2021-22, the transfers were 13.3 per cent higher than the corresponding period of previous year and as a per cent of states’ budget estimates they were also higher than those in Q2 of previous two years (Chart 7). b. Expenditure The Centre announced a fiscal package of ₹6.3 lakh crore in June 2021 in response to the second wave, which included inter alia extension of free provisions of foodgrains under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) until November8, enhanced fertiliser subsidy necessitated by the impact of increase in international prices of fertilisers, measures to strengthen public health, and loan guarantee schemes for COVID affected sectors. While some of these measures led to an additional expenditure over and above the budgeted amount, a large part was in the form of liquidity support and did not entail any additional fiscal burden. Subsequently, the first supplementary demand for grants, introduced in July 2021, proposed additional expenditure measures resulting in net cash outgo of ₹23,675 crore. The government also took precautionary steps to limit spending through expenditure curbs on various Central ministries and departments in Q2: 2021-22 (these expenditure limits have been relaxed with effect from September 24, 2021). As a result, despite pandemic related expansionary measures, total expenditure remained contained at 46.7 per cent of BE during H1:2021-22, as against 48.6 per cent and 53.4 per cent during first half of 2020-21 and 2019-20, respectively. ![]() Going forward, an expenditure pick up is expected in H2:2021-22, on the back of the second batch of supplementary demand for grants that has proposed net cash outgo of ₹2.99 lakh crore – ₹2.33 lakh crore on revenue expenditure and ₹0.66 lakh crore on capital expenditure. The first and second supplementary demand for grants together entail an increase of ₹3.23 lakh crore over budget estimates, which translates into a 7.3 per cent increase in total expenditure in H2:2021-22 over H2: 2020-21 and 82.0 per cent increase over H2: 2019-20 (Chart 8). Higher revenue expenditure in Q2, led to an overall increase of 6.3 per cent in H1. Revenue expenditure had contracted by 2.4 per cent in Q1:2021-22 over the previous year (though higher by 7.8 per cent over Q1:2019-20), partly on account of a high base in Q1:2020-21 when expenditure had to be frontloaded and also expanded to deal with the first wave of the pandemic. The expenditure focus was strategically tilted towards capital expenditure, with a y-o-y increase of 38.3 per cent in H1 over 2020-21 (growth of 22.3 per cent over 2019-20) (Chart 9 a and b). ![]() ![]() The roll-out of the Pradhan Mantri Gati Shakti National Master Plan is also expected to provide a fillip to infrastructure development in the country. Based on geographic information system (GIS), the Gati Shakti platform would map all existing and proposed economic zones, along with their multi-modal infrastructure linkages (rail, road etc.). Approvals for individual projects of different line ministries are to be viewed from the perspective of conformity to the Gati Shakti National Master Plan, thus ensuring a holistic and coordinated approach to infrastructure development. To spur capital asset creation by States, the Centre introduced a scheme for providing interest-free loans for new or ongoing infrastructure projects. The major subsidies outgo of the Central government, comprising food, fuel and fertilisers, stood at 53.8 per cent of BE in H1:2021-22 compared to 68.6 per cent of BE in the corresponding period of last year. Food subsidy accounted for 72.5 per cent of total outgo on major subsidies (Chart 10). States’ revenue expenditure recorded a y-o-y growth of 10.9 per cent and 14.6 per cent in Q1 and Q2 of 2021-22, respectively (26.0 per cent and 4.8 per cent, respectively, over the corresponding quarters of 2019-20). As per cent of States’ budget estimates, revenue expenditure in H1:2021-22 is broadly in line with previous year’s pattern. On the capex front, States are being nudged by the centre through interest-free loans under the scheme ‘Special Assistance to States for Capital Expenditure’.8 Furthermore, on meeting the capex target set by the Centre for Q1:2021-22, eleven States have been permitted to undertake additional open market borrowings equivalent to 0.25 per cent of GSDP. Thus, States’ capex has seen a robust y-o-y growth of 98.5 per cent and 57.9 per cent for Q1 and Q2:2021-22 (Chart 11). ![]() ![]() III. Fiscal Deficit and its Financing a. Fiscal Deficit Central Government After attaining a GFD of 9.2 per cent of GDP in 2020-21 (PA), the Union government has budgeted for a GFD of 6.8 per cent of GDP in 2021-22 with the medium-term target of below 4.5 per cent by 2025-26. However, due to improved revenue position and contained expenditure, the GFD of the Union government in H1:2021-22 stands at 35.0 per cent of BE, which is much lower than what was recorded in previous years (Chart 12). State Governments States have budgeted a GFD of 3.7 per cent of GDP for 2021-22, as against 4.7 per cent in 2020-21 (RE). In Q1:2021-22, their GFD stands at 3.2 per cent of quarterly GDP which, although lower than in Q1:2020-21, is significantly higher than the trend in pre-pandemic years. In H1:2021-22, GFD of States stands at 42.2 per cent of budget estimates (Chart 13). ![]() ![]() The quality of expenditure for both Centre and States, as measured by revenue expenditure to capital outlay (RECO) ratio, has reverted to its usual level after deteriorating significantly in H1:2020-21, when undertaking new capex projects was severely constrained by the pandemic. The improvement in the quality of government expenditure augurs well for medium-term growth prospects of the economy (Chart 14). ![]() b. Financing of GFD In H1: 2021-22, the Union government completed 57.5 per cent of the budgeted net market borrowings for 2021-22, which financed over 90 per cent of its GFD during the first half of the year. The borrowing programme of the Union government during H1:2021-22 was carried out smoothly with the 10-year g-sec yield remaining in the range of 5.97 to 6.26 per cent. It is also noteworthy that the Union government compensated the States fully for the shortfall in GST collections from within its own borrowing programme without resorting to additional borrowings in this fiscal year so far. A State-level analysis points to a generalised decrease in the first half market borrowings (as per cent of BE). Amongst the larger States, Uttar Pradesh, Bihar and Rajasthan have seen an increase in H1 borrowings. The overall net market borrowings in H1:2021-22, accounting for 34.4 per cent of BE, were 20 per cent lower than those in H1:2020-21 (Chart 15). Financial accommodation availed by States under various facilities from RBI came down in H1:2021-22 compared to the corresponding period of last year9. Overall daily utilisation under all the three facilities witnessed a y-o-y reduction of 14.6 per cent in H1:2021-22. Compositionally, while the Ways and Means Advances (WMA) and Overdraft (OD) facilities have seen an increased daily utilisation in H1:2021-22, the daily utilisation of Special Drawing Facility (SDF) has seen a sharp decline of 57.8 per cent. Amongst the major States/UTs, Jammu and Kashmir, Telangana, Andhra Pradesh, Manipur and Mizoram have seen an increase in daily utilisation of WMA in H1:2021-22 compared to H1:2020-21 (Chart 16). ![]() ![]() IV. General Government Finances The general government GFD for 2021-22 (BE) is budgeted to consolidate to 10.2 per cent of GDP from 13.3 per cent in 2020-21 (RE). In continuation of the effort to provide timely fiscal data on general government, quarterly fiscal position of the general government has been compiled till Q2:2021-22. In a departure from trend, general government GFD in Q4:2020-21 turned out to be higher than in Q2 and Q3: 2020-21, largely on account of on-budgeting of past Food Corporation of India (FCI) dues in March 2021. Due to improved revenue mobilisation by both the Centre and States, the general government GFD remained subdued in Q1 and Q2:2021-22. Going forward, while tax collections are expected to remain buoyant in Q3 and Q4, expected expenditure pick up could result in a general government deficit of 8.9 per cent and 12.9 per cent of GDP in Q3 and Q4 (projected), respectively. Accordingly, the GFD is expected to increase from 8.0 per cent of GDP in H1:2021-22 to 10.9 per cent in H2: 2021-22. ![]() After the pandemic-induced significant widening of general government fiscal deficit in 2020-21, both Centre and States demonstrated commitment to credible fiscal consolidation in their 2021-22 budgets even while sustaining the needed fiscal support to growth. During H1:2021-22, while nurturing a stimulus led recovery that raised GDP in Q2:2021-22 to pre-pandemic levels, the envisaged fiscal consolidation has been pursued. Robust growth in tax revenues, reflecting improved tax governance and administration, and the thrust on capex bode well for achieving both durable growth revival and fiscal consolidation in the medium-term. Within capital outlay, however, it is important for both the Centre and the States to channelise expenditure to sectors that can crowd-in private investments and optimise multiplier effects based on inter-temporal and intersectoral linkages that can boost output, employment and productivity. Going forward, notwithstanding renewed concerns associated with the new omicron variant of the virus, as economic revival gains further traction, the Centre and States should provide credible medium-term glide paths towards fiscal policy normalisation so that fiscal buffers can be replenished to deal with future economic shocks, if any. Appendix Tables
* This article is prepared by Rachit Solanki, Saksham Sood, Ipsita Padhi, Dr. Somnath Sharma, Dr. Samir Ranjan Behera and Dr. Atri Mukherjee of Department of Economic and Policy Research. The team is thankful to Dr. Deba Prasad Rath for his valuable guidance. The authors are also grateful to Shri Sitikantha Pattanaik and Shri Bichitrananda Seth for their comments and valuable suggestions. The views expressed are those of the authors and do not necessarily reflect the views of the Reserve Bank of India. 1 These estimates were based on the modest assumptions of a nominal GDP growth of 14.4 per cent and tax buoyancy of 1.2 and a mild contraction in revenue expenditure. 2 Based on aggregate data for 26 States for which complete historical and updated data up to Q2:2021-22 are available. 3 Growth of 260.0 per cent over 2020-21 and 89.5 per cent over 2019-20. 4 Non-debt capital receipts include recoveries of loans and advances and miscellaneous capital receipts (disinvestment and other receipts). 5 Over 2019-20, income and corporation taxes increased by 28.7 per cent and 23.8 per cent, respectively. 6 Growth of 27.1 per cent over 2019-20. 7 Footnote: For Delhi and Chhattisgarh, it is from December to March 2021-22. 8 This has been further extended till March 2022 (Appendix Table 5). 9 Under the scheme, financial assistance is provided to State governments in the form of 50-year interest free loan. An amount not exceeding ₹12,000 crore was earmarked for 2020-21 and an amount of ₹11,830.3 crore was released to the States in 2020-21. On April 29, 2021, the Centre announced the decision to provide an additional amount of upto ₹15,000 crore to States as interest-free 50-year loan for spending on capital projects. As of September 25, 2021, the Centre has approved capital projects of ₹2,903.8 crore in 8 States under the scheme entitled ‘Special Assistance to States for Capital Expenditure for 2021-22’. The Ministry has also released an amount of ₹1,393.8 crore to these States, viz., Bihar, Chhattisgarh, Himachal Pradesh, Madhya Pradesh, Maharashtra, Punjab, Sikkim and Telangana. 10 Financial accommodation to the states is provided by the RBI through the Special Drawing Facility (SDF), Ways and Means Advances and Overdraft (OD). |