Why the record budget deficit in the June quarter is unlikely to continue
The June quarter budget deficit figure for FY22 was a bit surprising given the rise in budget spending due to the second wave of Covid-19 and its impact on the economy. But since this is only the first trimester, not much can be read in these numbers.
The budget deficit for this June quarter was 2,74,245 crore, about 58.6% lower than the June quarter of FY21 and 36% lower than the corresponding quarter of FY20. Direct tax collections and the transfer of RBI surpluses saved the day, combined with tighter control of revenue spending. But there are many reasons why the number is likely to increase in the coming quarters.
Direct taxes soar
The reduction in the budget deficit is mainly due to a sharp increase in tax and non-tax revenue in the June quarter of this fiscal year. The RBI surplus transfer of 99,122 crore yen, well above the budgeted amount of 61,286 crore, helped to increase non-tax revenue by 738% to 1,27,317 crore.
But the jump in the collection of direct taxes is a little more difficult to explain. Corporate income tax collection for the first quarter of fiscal 22 was 1,23,689 crore. This is more than double the amount collected in the corresponding quarter of FY21. Surprisingly, this figure is also 75% higher than the collection in the same quarter of FY20, which was a pre-pandemic period. Equally robust is the trend towards income tax collection.
“It is difficult to determine why there is a jump in the collection of direct taxes in a quarter. Obviously, the impact of the pandemic on business has been less than expected, ”says Madhavi Arora, Chief Economist, Emkay Global Financial Services. “The profitability of large companies and the incomes of individuals have not been too affected by the pandemic. Companies have improved their profitability through cost reductions etc. Perhaps that could explain the jump in corporate taxes.
However, since the collection of corporate tax in the first quarter is based on an estimate of profitability for the full year, it is possible that collections will be less robust in the coming quarters depending on perception of the impact of the pandemic.
The increase in direct taxes goes against the change in GST collections. The GST collected this quarter of June was almost on par with the collection of the corresponding quarter of FY20.
Spending under control
The reduction of the budget deficit was also made possible by the containment of all non-essential revenue expenditure. Revenue expenditure is 2 percent lower despite a 14 percent increase in interest payments. That is expected to change over the next few quarters due to increased spending due to the second wave of the pandemic.
Because the budgeting exercise is cash-based, many of these payments can be posted in subsequent quarters of that fiscal year.
“For 2021-22, on the revenue side, the slippage could be in disinvestment while the tax collections and the transfer of surpluses from the RBI provide comfort. On the expenditure side, it is likely that spending on food, fertilizer, MNREGA and health will be higher than initially expected. Since most departments have been asked to be judicious about their non-core revenue spending, overall revenue spending may be lower. But I don’t expect any reduction in capital spending, ”adds Arora.