Given there’s been no direct stimulus—and likely none coming—high fuel taxes and their impact on inflation are unconscionable
Thanks to high levies on auto fuels, soaring corporate profits, a jump in income taxes and higher imports, the government’s gross tax collections in the June quarter have been robust. At Rs 4.12 lakh crore, they are around a fourth of the budget estimates (BE) for the year. GST collections in July came in at Rs 1.16 lakh crore, up 33% year-on-year (y-o-y), an indication that consumption is picking up now that lockdown restrictions have been eased in most parts of the country.
To be sure, it may not be advisable to count the chickens just yet. A third wave of the pandemic can’t be ruled out yet, and high commodity prices could crimp corporate profits, albeit only slightly. Nonetheless, should the economy stay on course, tax collections for FY22, targetted at Rs 22.2 lakh crore should not be a stretch because given the better-than-anticipated collections in FY21, the increase this year is a very modest 9.5%. Going by the current trend, most economists expect the collections to be at least 12-13% higher.
That would help ease pressure on the fiscal deficit, which, for the June quarter, was just over 18% of the budget estimate (BE) and way below the historical average. As Credit Suisse has pointed out, the deficit would have been modest at 25% of the BE even if the early dividend from RBI had not come in. Much of this has to do with muted expenditure, which, at Rs 8.22 lakh crore, was just 1% higher y-o-y. The good news is that capital expenditure was up 26% y-o-y—essentially spends on roads and railways—while revenue expenditure was lower by 2% and food subsidies were high.
To be sure, expenditure picked up in June, and two-thirds of the year remains, but commentary from North Block suggests expenditure will stay muted through the year and may undershoot the targets. Spending by most departments in Q1FY22 is learnt to have stayed within 20% of the year’s BE, against the available limit of 25%. An FE estimate showed savings for the Centre could be as much as Rs 1.15 lakh crore in the first half of the current fiscal.
One reason the Centre could be keeping expenses on a leash is the concern it may not meet the disinvestment target of Rs 1.75 lakh crore. The government’s track record in this department is nothing to write home about. Indeed, the privatisation of BPCL, the listing of LIC and the sale of Air India are all taking their own time.
Not surprising then, finance secretary TV Somanathan recently told FE the scope for a big fiscal expansion is ‘limited’. The need to rein in the fisc at the targeted 6.8% this year, on the back of a 9.3% deficit in FY21, and to keep public debt in check can be well appreciated.
But if cash transfers have been ruled out—because the beneficiaries tend to save rather than spend—and if there is to very limited stimulus, there is definitely a strong case for lowering levies on diesel. The Centre’s reasoning the weightage of auto fuels in the inflation basket is small is unacceptable.
The rising prices of diesel have pushed up prices of a range of goods, at a time when prices of all goods and services are already high. Given it has provided very little direct stimulus post the pandemic, the Centre needs to do its bit to keep inflation reined in.