1. How to boost the slowing Indian economy? Find out here

How to boost the slowing Indian economy? Find out here

Finance minister Arun Jaitley is probably not off the mark when he says the government’s tax revenues for the current fiscal will top estimates.

By: | Published: January 9, 2017 6:21 AM
The economy is being dragged down mainly by the manufacturing sector which has been under-performing for nearly two years now. (Reuters) The economy is being dragged down mainly by the manufacturing sector which has been under-performing for nearly two years now. (Reuters)

Finance minister Arun Jaitley is probably not off the mark when he says the government’s tax revenues for the current fiscal will top estimates. The minister’s optimism must stem from the trends in the collections between April and November, which have surprised on the upside. Excise duties, for instance, have jumped 46%, way above the targeted growth of 12% while corporation taxes are up a good 21%, against a budgeted 9%. The mop-up from service tax has been higher by as much as 27% against a conservative target of 10%. So, there is clearly some cushioning to absorb the shock to the economy due the disruption caused by demonetisation, which is expected to result in a fairly sharp slowdown across sectors in the second half of the year, shaving off anywhere between 150-200 basis points from the GDP for this period.

High frequency indicators—sales of CVs and two-wheelers, truck rentals and loan growth—show there may have been a fair bit of damage done by the acute shortage of currency in circulation. However, the government is probably betting on a revival in consumption demand in the last three months of the year once there’s more cash available with households, and also on the manufacturing sector regaining some of the lost momentum. In addition, a whole host of companies that were under-declaring their revenues are expected to report higher turnovers, though it is difficult to quantify how much this could fetch the government in terms of taxes. With the Income Disclosure Scheme-1 (IDS-1) netting around R15,000-20,000 crore of taxes, the Rs 16.3 lakh crore target should not be hard to meet. What’s worrying, though, is that there will be a shortfall in the planned Rs 56,500 crore mop-up from disinvestments since just R23,529 crore has been raised so far, and there is a large shortfall in telecom receipts as well.

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It is critical the government is able to mobilise revenues because it needs to spend to keep the economy going—the extra revenues from IDS-2, and a possible demonetisation bonanza from RBI will help get extra revenues in FY18. It is now abundantly clear the economy had started slowing down even before the demonetisation exercise started—the advance CSO estimates peg the GDP growth for FY17 at 7.1% lower than the 7.6% in FY16, and this is based on data before demonetisation took place. The economy is being dragged down mainly by the manufacturing sector which has been under-performing for nearly two years now. In particular, gross fixed capital formation has been falling as a share of GDP, from an already low 28.3% in Q1FY17—it was 36.2% in Q2FY12—to 27.1% in Q2FY17. In the absence of spends by the private sector, the government must step on the accelerator. And its finances must allow it to spend without impinging on the deficit target. While total spends so far, at Rs 12.8 lakh crore of the budgeted Rs 19.8 lakh crore are reasonable, those on the capital account are less than 60%, and are undershooting targets. Given the budgeted expenditure on the capital account for 2016-17 was just 4% higher than that in FY16, the pace of spending needed to be stepped up meaningfully. Specifically, there needs to be a focus on execution with the government helping companies with permissions and clearances, so that projects get off the ground. Without a big pick-up in investments, the economy runs the risk of losing lot more momentum.

  1. A
    Anil sharma
    Jan 11, 2017 at 1:24 pm
    Good now we should set target 8 percent Anil sharma
    Reply

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