With tax revenues likely to be hit hard due to Covid-19, the Centre should present another Budget for FY21 after the pandemic is fully contained, former finance secretary Subhash Chandra Garg told FE. Since borrowing is likely to be scaled up in the second half of this fiscal than Budget plans suggest, he said the fiscal deficit should be monetised in view of the need to give stimulus to people and companies struggling with massive disruptions in the economic activity.
“Sometime after the first quarter or when the dust around Covid19 settles, the Centre should present another Budget for FY21 restating all the numbers,” Garg said. Also, instead of banks buying government securities and drying up liquidity for the private sector, the government should directly sell the securities to the Reserve bank of India to monetise fiscal deficit as this is an extra-ordinary situation,” the former finance secretary said.
With devolution from central taxes and grants, which comprise about 48% of revenues of all the states combined (for some states, it is over 60%), a reduction in central transfers can have large macroeconomic spillovers. States’ capital/development expenditure accounts for close to two-thirds of the combined (Centre and states) capital expenditure.
Irrespective of revenue collections, Garg said the Centre should not stop release of the first instalment of tax devolution to states in April and the practice of advance release of funds for various central schemes. As per extant norms, tax devolutions are made in 14 instalments, one in each month up to February and three installments in March. The Centre also does advance release of 25% to more of total funds in many schemes in April for orderly implementation of central schemes by states.
Garg said the Centre and states’ combined monthly collection in indirect taxes could come down to a mere Rs 50,000 crore. Similarly, on the direct tax side, the Centre’s collections could decline by at least 25%, rendering the Budget estimates irrelevant.
Even though the borrowing calendar for FY21 has been kept at the Budget estimate level for FY21 (Rs 7.8 lakh crore), the borrowing would likely go up in the second half of this fiscal, Garg said.