IAS Gyan

Daily News Analysis

On the other  Borrow to spend

2nd October, 2020 Economy

Context: Despite pick up in economic activity and tax collections, Centre may need to borrow more than anticipated.

  • Leading indicators suggest a continued pick up in economic activity, despite COVID infections spreading.
  • As per the Controller General of Accounts (CGA) released data on central government finances for the first five months (April-August) of the current financial year five broad trends emerge.
    • First, after contracting for four consecutive months, the Centre’s gross tax revenues grew marginally in August.
    • Second, this uptick in tax revenues was driven by indirect tax collections, as direct tax collections continue to contract.
    • Third, collections from disinvestment and non-tax sources remain depressed.
    • Fourth, despite the clamour for greater government support, government spending during this period grew at a much slower pace than what was projected in the budget.
    • And fifth, even though government revenues, both tax and non-tax, are likely to pick up as economic activity gains traction, the Centre may need to borrow more than what it has anticipated so far in order to meet its expenditure priorities.
  • At the aggregate level, the Centre’s gross tax collections during this five-month period contracted by 23.7 per cent over the same period last year, reflecting the economic hit from the pandemic.
  • However, the pace of contraction has eased in each subsequent month, and tax collections grew by 2 per cent in August. This uptick was driven largely by higher excise collections, and a favourable base effect owing to the settlement of the integrated GST (IGST).
  • On the other hand, non-tax collections and disinvestment proceeds continue to remain depressed.
  • Slippages on account of dividends and proceeds from the telecom sector will have a bearing on its ability to meet the target this year.
  • Similarly, the Centre’s ability to meet the Rs 2.1 lakh crore disinvestment target for the year is also questionable.
  • Equally worrying is the second straight month of decline in central government capital expenditure, and the slowing pace of its revenue expenditure.
  • Leading indicators suggest a continued pick up in economic activity, despite COVID infections spreading.
  • Despite shortfall in the Centre’s overall revenue measured against its budgeted expectations and its expenditure priorities suggest that even the additional borrowings it has planned for — the Centre had raised its borrowing from Rs 7.8 lakh crore to Rs 12 lakh crore — may not be enough.
  • Given the continuing uncertainty over the pandemic, continuing stress on its revenues, and demand for greater support than what has been provided so far, the Centre may well need to borrow more in order to finance its spending.