The government may look at the RBI for some financial support this year too, like it got through a higher dividend payout last year.

Govt to look at wider fiscal deficit tax on fuel to fund Rs 20 lakh crore package
Money Wednesday, May 13, 2020 - 11:24

The government will depend heavily on taxes levied on petrol and diesel to finance its biggest-ever Rs 20 lakh crore economic package announced by Prime Minister Narendra Modi on Tuesday to revive the economy hit hard by Covid-19 pandemic.

Sensing the enormity of the situation and need for a larger economic package, the government, on May 5, had raised excise duty on petrol and diesel by unprecedented level of Rs 10 and Rs 13 per litre. This itself will provide additional revenue of about Rs 1,75,000 crore in FY21

Moreover, the government can further raise duty on the two products by Rs 3-6 per litre, thereby raising another Rs 50,000-60,000 crore. So total earnings for the Centre from petroleum products itself could top Rs 2,25,000 crore in additional revenue besides over Rs 2,15,000 that it already gets in a year as excise revenue from the petroleum sector.

In addition, sources indicated that import duty on a few items may be raised as the government looks strengthening its 'Make in India' and 'Made in India' initiatives.

The government may look at the RBI for some financial support this year too, like it got through a higher dividend payout last year. In the last fiscal, the Reserve Bank of India (RBI) approved a Rs 1,76,000 crore ($24.8 billion) dividend payment to the government, including Rs 1,48,000 crore for FY20. Similar or more dividend may flow this year too to help the government to finance its economic package.

There is also escape clause under the FRBM (Fiscal Responsibility and Budget Management) Act that helps the government to expand its fiscal deficit by 0.5% of GDP in a given year in extreme cases of needs.

But the government has already used the escape clause for FY20 and FY21 as fiscal deficit has been expanded by 0.5% of the target to 3.8 and 3.5% of GDP, respectively. So, if fiscal deficit has to be breached further, the government will have move an ordinance and expand the scope of its finances.

The fiscal deficit is the total amount by which the government's expenses for a year exceed its revenues.

For the current fiscal, the government's borrowings target has already been raised by over 50% as additional expenditure and funding needs to stimulate the economy hit by Covid-19 pandemic has pushed up need to mobilise resources.

Accordingly, the estimated gross market borrowing in the financial year 2020-21 has now been set at Rs 12 lakh crore in place of Rs 7.80 lakh crore as per budget estimate for current year.

The overall Rs 20 lakh crore crore package works out to 10% of GDP. This level of support for fight against Covid is higher than what governments in several richer countries have announced recently.

(Subhash Narayan can be contacted at Subhash.n@ians.in)

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