challenges the second Covid wave poses to India’s path to fiscal consolidation.

The article highlights the challenges the second Covid wave poses to India’s path to fiscal consolidation.

The growth projections of different national and international agencies and the fiscal projections of Centre’s 2021-22 Budget require recalibration.
The International Monetary Fund (IMF) had forecast real GDP growth for 2021-22 at 12.5%.
The Reserve Bank of India (RBI) had forecast real GDP growth for 2021-22 at 10.5%.
The Ministry of Finance’s Economic Survey had forecast real GDP growth for 2021-22 at 11.0%.

Moody’s has recently projected India’s GDP growth in 2021-22 at 9.3%.
Benchmark growth rate: 9.3% is close to the benchmark growth rate of 8.7% which would keep India’s GDP at 2011-12 prices at the same level as in 2019-20.
This level of growth may be achieved based on the assumption that the economy normalises in the second half of the fiscal year.
The 2019-20 real GDP was ₹145.7-lakh crore at 2011-12 prices.
It fell to ₹134.1-lakh crore in 2020-21, implying a contraction of minus 8.0%.
At 8.7% real growth, the nominal GDP growth would be close to 13.5%, assuming an inflation rate of 4.5%.
This would be lower than the nominal growth of 14.4% assumed in the Union Budget.
At 13.5% growth, the estimated GDP for 2021-22 is ₹222.4-lakh crore at current prices.
Impact: This will lead to a lowering of tax and non-tax revenues and an increase in the fiscal deficit as compared to the budgeted magnitudes.

The budgeted gross and net tax revenues for 2021-22 were ₹22.2-lakh crore and ₹15.4-lakh crore, respectively.
The assumed buoyancy for the Centre’s gross tax revenues (GTR) was 1.2.
If, however, the buoyancy of 1.2 proves optimistic and instead a buoyancy of 0.9, which is the average buoyancy of the five years preceding the COVID-19 year, is applied, the nominal growth of GTR would be 12.2%.
This would lead to the Centre’s GTR of about ₹21.3-lakh crore.
The corresponding shortfall in the Centre’s net tax revenues is estimated to be about ₹0.6 lakh crore.
The budgeted magnitudes for non-tax revenues and non-debt capital receipts at ₹2.4-lakh crore and ₹1.9-lakh crore, respectively, may also prove to be optimistic.
In these cases, the budgeted growth rates were 15.4% and 304.3%, respectively.
The excessively high growth for the non-debt capital receipts was premised on implementing an ambitious asset monetisation and disinvestment programme.
Together with the tax revenue shortfall of nearly 0.6 lakh crore, the total shortfall on the receipts side may be about ₹2.1-lakh crore.

Two factors will affect the fiscal deficit estimate of 6.76% of GDP in 2021-22.
First, there would be a change in the budgeted nominal GDP growth.
Second, there would be a shortfall in the receipts from tax, non-tax and non-debt sources.
Together, these two factors may lead to a slippage in fiscal deficit which may be close to 7.7% of GDP in 2021-22 if total expenditures are kept at the budgeted levels.
This would call for revising the fiscal road map again.
Protecting total expenditures at the budgeted level is, however, important given the need to support the economy in these challenging time.

Positive externalities: COVID-19 vaccination is characterised by strong inter-State positive externalities, making it primarily the responsibility of the central government.
The entire vaccination bill should be borne by the central government.
If the central government is the single agency for vaccine procurement, the economies of scale and the Centre’s bargaining power would keep the average vaccine price low.
The central government may transfer the vaccines rather than the money that it has budgeted for transfer.
Some of the smaller States may find procuring vaccines through a global tender to be quite challenging.

Protecting total expenditures at the budgeted level and mass vaccination are important in India’s pandemic situation.

There is a strong connection between the government’s tax revenue earnings and economic growth.
Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP.
It refers to the responsiveness of tax revenue growth to changes in GDP.
When a tax is buoyant, its revenue increases without increasing the tax rate.
In 2007-08, everything was fine for the economy, GDP growth rate was nearly 9 per cent.
Tax revenue of the government, especially, that of direct taxes registered a growth rate of 45 per cent in 2007-08.
We can say that the tax buoyancy was five (45/9).

It refers to changes in tax revenue in response to changes in tax rate.
For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity.

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