Divergence in revenue estimates due to early Budget or lack of discipline?

Provisional actuals of the Budget for 2020-21 have once again varied sharply from the revised estimates. The variation provides fiscal cushion, but also raises several questions

For two years running, the Union government’s Budget numbers on revenue showed a large variation between those that were presented as the Revised Estimates (RE) in the first week of February and just about four months later as the Provisional Actuals (PA).
 
That happened in 2018-19 and 2019-20, understandably rattling the faith of many in the sanctity of these numbers. How could numbers vary so much in the space of just four months, with the PA being less than RE?
 
For 2020-21 also, the divergence between RE and PA made experts raise doubts about the robustness of the procedures used in calculating the RE numbers in the Budget. But the saving grace this time was that the direction of the divergence was different, with a positive impact on the Centre’s fiscal balance.

 

In 2018-19, the net tax revenue for the Centre was Rs 13.67 trillion according to the RE. But four months later in June, the PA showed the net tax revenue at just about Rs 12 trillion. This led to cuts in expenditure through a mix of innovative and controversial accounting measures, which in effect helped the government dress up its accounts so that the fiscal deficit number stayed at the level mentioned in RE. (For more details, click here)
 
In 2019-20, there was a virtual re-run of what happened in the previous year. The Centre’s net tax revenue was projected at Rs 15 trillion in RE in February 2020. But four months later, in June 2020, the PA showed them to be at Rs 13.56 trillion – a shortfall of Rs 1.49 trillion. This time there was no dressing up of the accounts. Instead, the government went for higher borrowings and marginal cuts in expenditure, which effectively raised the fiscal deficit number. (For more details, click here)

 
For 2020-21, the trend of variation continues, but in a different direction. Instead of a shortfall, the PA shows a revenue excess. In February 2021, the Budget had shown the Centre’s net tax revenue, according to RE, at Rs 13.44 trillion. But the Controller of General Account’s figures for 2020-21, released last week, show the Centre’s net tax revenue, according to PA, at Rs 14.24 trillion – an excess of Rs 80,000 crore. 
 
Taking into account a marginal dip in the Centre’s non-tax revenue, the provisional actuals for the Centre’s net revenue was higher by about Rs 76,940 crore compared to the RE figure. There was also a saving of about Rs 13,600 crore on account of lower capital expenditure, boosting the Centre’s total excess amount to Rs 90,540 crore.

 
The government had the option of booking the entire excess amount and use it for reducing its fiscal deficit amount. But it chose to forgo that option. Instead, in a prudent move, it used up a large portion of that excess amount prepaying the dues to the Food Corporation of India under the food subsidies head. In the process, it reduced the fiscal burden that it would have to carry in 2021-22 and also obviated the need for extra-Budget borrowings in the current year to finance its food subsidy bill.
 
It still managed to reduce its fiscal deficit from the RE figure of 9.5 per cent of gross domestic product (GDP) to 9.2 per cent, largely because of a higher estimate of the nominal size of GDP at Rs 197 trillion. Earlier, the nominal size of the Indian economy had been estimated at Rs 195 trillion.

 
The sharp divergence in the tax revenue numbers, given in the PA, also points to how the government’s dependence on indirect taxes is on the rise. The excess in indirect tax collections – Customs and excise, and even GST – was much more than what was recorded in the collection of corporation tax and individual income tax.
 
In sum, the excess in the PA figures over the RE of the Budget for 2020-21 was a big help in clearing up its food subsidy dues to FCI, apart from effecting a small cut in the fiscal deficit. But questions will continue to be asked about why the finance ministry fails to get its RE revenue numbers closer to the actual collections.

 
Is the divergence because of the advancement of the presentation of the Budget by about four weeks? Budgets from 2017 onwards have been presented on February 1, while previous Budgets were presented at the end of February. Or, is it because of a lack of rigour in the discipline of making the revenue estimates as realistically as possible?