Constituent policy

Status quo on prices or hiking? RBI monetary policy meeting must not lose sight of fiscal math

Each government’s target is to meet the budget deficit target and the Center is expected to meet its target for the 2021-22 financial year. The government had set a budget deficit target of Rs 15.07 lakh crore or 6.8% of GDP for FY22 for stronger and sustainable growth. The target was later revised to Rs 15.91 lakh crore or 6.9% of GDP. The Centre’s budget deficit in April-February 2022, according to monthly data from the Auditor General, stood at Rs 13.17 lakh crore. It is 87.4% of the provisional budget (BE) and 82.7% of the provisional budget (RE). The budget deficit was 76 percent of the BR in the corresponding period last fiscal year.

Total government revenue in the first 11 months was Rs 18.27 lakh crore. It accounts for 84% of the ER of Rs 21.79 lakh crore. Total inflow during the same period of FY21 was around 88% of the ER of Rs 15.55 lakh crore. During the same period, the total expenditure of the Center was Rs 31.44 lakh crore against the RE of Rs 37.70 lakh crore. It amounted to 83.4% of the BR compared to the corresponding ratio of 81.7% in 2020-2021. This is despite the fact that FY22 total revenue was a bit lower and total expenditure was a bit higher compared to FY21. But FY22 budget position is much better than FY21.

Collection of direct and indirect taxes

We are in a better position in terms of budget management due to the fiscal dynamism of direct and indirect taxes and low interest rates. Goods and Services Tax collection averaged Rs 1.24 lakh crore per month in FY22. According to BEEP, the collection for the month of March was an all-time high of Rs 1.42 lakh crore. The average gross monthly GST collection for the fourth quarter of FY22 was Rs 1.38 lakh crore. It was Rs 1.10 lakh crore in the first quarter, Rs 1.15 lakh crore in the second quarter and Rs 1.30 lakh crore in the third quarter.

On the direct tax front, according to the GDP notification, the government collected net direct taxes of Rs 13.63 lakh crore – comprising Rs 7.19 lakh crore of corporate tax and Rs 6.41 lakh crore personal income tax from April 1 to March 16. It accounts for 123% of BE of Rs 11.08 lakh crore and 109% of RE of Rs 12.50 lakh crore in FY 2022. % over the corresponding period of the 2020-21 financial year. The growth was 42.5% in 2019-2020 and 34.96% in 2018-2019 during the same period. Net direct tax collection was Rs 9.18 lakh crore in FY21, Rs 9.57 lakh crore in FY20 and Rs 10.09 lakh crore in FY19.

Worrying points

On the other hand, the performance in terms of disinvestment has not been satisfactory. The government had set the budget target for divestment from CPSUs (Central Public Sector Units) at Rs 1.75 lakh crore, which was later revised to Rs 0.78 lakh crore. However, according to the DIPAM website, the actual receipt was Rs 0.14 lakh crore – just 8% BE and around 18% RE. Even the 18% realized was due to proceeds from the monetization of national highways, worth Rs 1,011 crore. The under-realization of divestment proceeds is a concern because over the past two years it has become a crucial part of budget calculations.

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The interest rate has a big influence on the budget limits as the RBI has kept it at 4% since May 2020. As a result, the debt service cost was also low since the Centre’s main debt comes from internal sources. According to the 2022 budget, the debt from internal sources is 96.8% against the total debt of Rs 135.87 lakh crore.

The most worrying thing right now is the ongoing conflict between Russia and Ukraine and the US Federal Reserve’s plan to raise interest rates. It’s a blow to the economy. This will hurt growth and discourage investment. This will disrupt the supply chain causing prices to spike. Inflation already hit an 8-month high of 6.07% in February. Higher inflation may not only increase the cost of imports and expand the trade balance, but it will also affect growth. The US Federal Reserve’s interest rate hike plan will have an impact on investment in India. So far this year, foreign investors have been net sellers of around Rs 1.27 lakh crore. This will appreciate the value of the US dollar while depreciating the Indian rupee.

In such a situation, all eyes are on the current fiscal year’s Monetary Policy Committee (MPC) meeting. Whether RBI maintains the status quo on rates or raises them to address both challenges remains to be seen. However, an increase in interest rates will not just scratch demand which is still below pre-COVID levels, it will also increase the cost of debt for the government. An increase in the cost of debt will affect the government’s fiscal math for FY23.

The RBI is expected to maintain balance through interest rates to curb inflation, retain investors, keep the cost of government debt low and spur growth.

The author teaches at ITS Ghaziabad. He can be followed on Twitter @meetdrvinay. The opinions expressed in this article are those of the author and do not represent the position of this publication.

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