The recently released provisional actual numbers for the Union Budget for 2024-25 have highlighted a significant issue of revenue overestimation. This problem, which had not been seen in the past four years, has resurfaced in the current fiscal period, raising concerns about government financial management.
Overview of Union Budget Estimates and Provisional Numbers
The Union Budget’s Revised Estimate (RE) is released about two months before the financial year's end. Ideally, the RE should not vary significantly from the provisional actual numbers released later. Overestimation of revenue or underestimation of expenditure poses risks to financial management.
Historical Context
- Revenue overestimation was particularly notable in the 2019-20 Budget, leading to a fiscal deficit of 4.6% of GDP, compared to the 3.8% predicted.
- From 2020-21 to 2023-24, the actual revenue collections exceeded the RE, indicating a trend of revenue underestimation.
Current Fiscal Year Concerns
- For 2024-25, provisional actual net tax revenue is 2.3% lower than the RE, with personal income-tax collections significantly down by 6%.
- The discrepancy in personal income-tax collections, amounting to a reduction of ₹74,000 crore, requires investigation to understand the underlying causes.
Impact on Government Expenditure
- The RE for revenue expenditure was ₹36.98 trillion, but the provisional actual number was reduced to ₹36.03 trillion.
- Despite the reduction in revenue expenditure, capital expenditure saw an increase, reflecting an improvement in the quality of spending.
- The fiscal deficit remained at 4.8% of GDP due to an upward revision in the nominal size of the Indian economy.
Implications of Revenue Overestimation
- Large variations between RE and actuals can lead to last-minute expenditure cuts, resulting in fiscally unhealthy outcomes.
- Persistent revenue overestimation may necessitate undesirable financial practices like transferring spending liabilities or off-Budget borrowings.
Indicators of Economic Health
- A mismatch in revenue figures can signal weaknesses in economic activity. For instance, revenue overestimation in 2019-20 coincided with slowing growth.
- Similarly, the underestimation of revenue during 2020-21 to 2023-24 aligned with a recovery in GDP growth.
- India’s economic growth slowed to 6.5% in 2024-25 from 9.2% in 2023-24, suggesting that revenue shortfalls may indicate weakening economic growth.
Conclusion
Given the rising uncertainties in the external sector, the Indian economy faces formidable challenges. Fiscal discipline is more than achieving deficit targets; it involves accurate revenue and expenditure forecasts. It is crucial to investigate the reasons behind the slowdown in actual revenue collections to address potential economic weaknesses effectively.
