In the post-demonetisation phase, the government’s tax revenues have ended up soaring in November. This is in stark contrast to the expectations of widespread economic disruption dragging down tax revenues. As Chart 1 shows, gross tax revenue rose by 54 per cent in November, up from last year, with both direct and indirect taxes registering strong growth.
Among direct taxes, both corporate and income tax collections rose sharply in November, as seen in Chart 2. Collections of corporate tax have risen despite expectations of corporate top line being hit by demonetisation. Indirect tax collections have also seen robust growth, as shown in Chart 3. But it is perplexing that Union excise duties have shown robust growth, despite industrial production being lacklustre.
On the expenditure front, government spending seems to have moderated in October and November as shown in Chart 4. What is worrying is that capital expenditure or capex (both Plan and non-Plan) has also slowed. While the contraction in capex in October could be on account of repayment of loans (going down more than 100 per cent), total capex spending has reached only 58 per cent of the budgeted amount by November, as shown in Chart 5. With private investments continuing to be sluggish unless government spending ramps up significantly, a revival in the investment cycle seems unlikely.
The fiscal deficit has already reached 86 per cent of the budgeted amount, as shown in Chart 6, but since tax revenues are likely to end up overshooting expectations, they may create extra fiscal space for the government to boost spending in order to offset the adverse impact of demonetisation.