According to the Mid-Year Economic Review, published on Friday by the Finance Ministry, for the first time in five budgets, the government has been able to make a reasonable estimation of how much revenue it is likely to earn. In the first half of last year, the government got its revenue forecasts off the mark by a whopping 16%, which substantially altered its budget. Last year a substantially higher rate of error in revenue forecasting was absorbed by the government than the average error percentage in the preceding four years.
In the first half of this year, however, the government seems to have done better on not just planning its revenue but also forecasting its financials. Therefore, the error percentage this time came down to a mere 1.2%.
The issue with misreading of revenues is that it has the potential to derail government's budgetary targets for the financial year as even regular expenditures put further strain on the government's finances. Better estimation of revenues, this year's review says, will allow the government to achieve its fiscal ambitions for the year and prevent end-year unexpected expenditures from delivering a shock.
To put that in perspective, in the Mid Year Economic Review last year, the government noted that it over estimated tax revenue by Rs 1,05,000 crores. Moreover, the review last year stated that there was an overestimation of India's nominal growth rate too and in the light of inflation and tepid growth, it ended up with a revenue optimism of Rs 27,000 crores. Therefore, the government ended up with an overly positive expectation of its revenues and planned for its expenditures in conjunction to that but that's not the case anymore.
"There has been a substantial improvement in forecasting revenues," this year's review notes. "The forecast error this year is less than 20% of the average for the last few years in all categories. The improvement is especially large in relation to last year. Not only does this bode well for future budgeting, better forecasts also mean that the disruption that takes place at the end of the year by having to slash expenditures can be avoided or minimized. "