Frontload devolutions to states: Revenues likely to top estimates by Rs 2 lakh crore; states can use the funds to prop up the recovery

Indeed, given the difficult environment, it must be said the Centre is managing its finances well; cash balances with RBI, at the end of September, stood at a fairly sizeable Rs 1.82 lakh crore, much the same levels as at the end of March.

Going by the tax collections, the economy, it would appear, is not just recovering fast, it’s also formalising fast. A fading favourable base notwithstanding, they jumped 50% y-o-y in September, taking the H1FY22 collections well past the halfway mark estimated for the year. It is not unlikely tax revenues will remain robust in the coming months, topping the annual estimates by a substantial Rs 2 lakh crore.

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To be sure, economists have been saying for some time now, the Centre’s tax targets for the year are conservative. The Centre’s gross tax collections were up 64% year-on-year in H1FYXX, well above the 9.5% required run rate to hit the annual target of Rs 22.17 lakh crore. What’s equally striking is the surge in the Centre’s net tax receipts at 101% y-o-y; at Rs 9.2 lakh crore, that is nearly 60% of the amount baked into the budget estimates. Indeed, given the difficult environment, it must be said the Centre is managing its finances well; cash balances with RBI, at the end of September, stood at a fairly sizeable Rs 1.82 lakh crore, much the same levels as at the end of March.

Meanwhile, the share of the states in central taxes increased by a minuscule 0.08% in H1. Devolutions to the states so far have been on track, but given the buoyancy in taxes, more could be done. States are strapped for resources and some additional cash would come in handy at a time when the recovery in the economy is nascent. There is little point in holding back the funds till February or March, it would be too late by then. Given some Rs 60,000 crore or so—of the additional Rs 2 lakh crore—would be the share of the states, this could be given to them in instalments over the next few months. If the monthly devolutions stay within Rs 40,000 crore, the balance by March could be substantial and remain unutilised. After all, it is the states that do the bulk of the spending.

For its part, the Centre’s expenditure, which had been somewhat sluggish in the earlier part of the year, jumped 50% y-o-y in September. The government seems a lot more confident now and has lifted the expenditure curbs. The targeted increase in expenditure for the current year, versus the revised estimates for FY21, is anyway, just 1%. In H1FY22, capex spends were up by an encouraging 38% y-o-y, albeit on a low base; much of this, was used to build roads. The total capital expenditure outlay (including PSU spends funded via internal and extra-budgetary resources) are slated to increase by only a modest 8.7% over FY2020-22 and 4.8% over FY2021-22; that is despite a planned 26% increase in direct government spending on capital expenditure in FY2022.

Some economists have observed that the muted spends probably have more to do with slow execution rather than a lack of resources. Now that much of the economy has been opened up, the government needs to make sure projects get going; the Gati Shakti initiative should help speed up the process.

The government might need to accommodate higher expenses on account of the distribution of free food grains, bigger fertiliser subsidies and the arrears for export incentives, which could together cost it Rs 2 lakh crore. In the light of the buoyant tax collections, it should not hesitate to spend.