The finance ministry will prepare the roadmap on government revenue and spending, based on consultations with the ministries, including the railways and transport and highways.
The Prime Minister’s Office has asked the finance ministry to hold discussions with key ministries and stitch together a comprehensive presentation on ways to create massive jobs and stimulate economic growth that hit a three-year trough in Q1FY18. The finance ministry will prepare the roadmap on government revenue and spending, based on consultations with the ministries, including the railways and transport and highways. Given the limited fiscal space available, the government intends to adopt a targeted spending method for which identifying key sectoral issues are important, said a source. To pacify upset consumers, the government may also look at direct fiscal interventions such as lowering taxes on petroleum products, another official said. Steps to improve exports will be prepared after discussions with commerce and industry minister Suresh Prabhu. Some of these proposals could find their ways into next year’s Budget. Sectors with potential to create jobs and ways to improve private investments will be in focus, while the government intends to sort out teething troubles in the implementation of the goods and services tax (GST) fast so that its benefits are reaped at the earliest.
For the second consecutive day, finance minister Arun Jaitley held a brainstorming session with his ministerial colleagues and senior officials on Tuesday. Prabhu, railway minister Piyush Goyal, NITI Aayog vice-chairman Rajiv Kumar, Railway Board chairman Ashwani Lohani along with secretaries in the finance ministry, the chief economic adviser, principal economic adviser and commerce secretary took part in the discussions. A meeting to take stock of the economy by Prime Minister Narendra Modi on Tuesday, in which Jaitley and top officials of his ministry were to take part, has now been postponed by a few days, official sources said.
Similarly, talks with the road transport and highways ministry is being held to estimate expenditure on infrastructure projects. Some of the discussions are being attended by PK Mishra, additional principal secretary to the prime minister. Taking advantage of sharp decline in global crude prices, the Centre effected a series of excise duty increases on petrol and diesel between November 2015 and March 2016, which boosted its coffers and helped raise capex. Excise duty receipts from petroleum products rose 80% to Rs 1.78 lakh crore in FY16 and by 36% to Rs 2.42 lakh crore in FY17. The high tax incidence can be gauged from the fact that in Delhi, taxes account for 52% (30% by the Centre and 22% by the state) of the retail sales price of petrol at 70.52 per litre. Similarly, taxes constitute 44% (29% by the Centre and 15% by the state) of the price of diesel in the capital. Of course, the state government’s share in taxes on petroleum products is much higher than what their own taxes yield, as 42% of the divisible pool of central taxes are devolved to the states as per the finance commission formula. The opposition has often slammed the Modi government for the high taxes. In order to make a substantial difference, the states also need to be prodded to reduce sales/VAT on fuel products, which they might resent.
Given that the monetary policy committee may be unwilling to cut the key policy rates sharply due to rising inflation, the onus of spurring growth may mostly lies with the Centre. Retail inflation rose to a five-month high of 3.36% in August, but within the inflation target of 4% plus/minus 2%. “We certainly believe that we are in a slowdown mode since Q2FY17 and any slowdown that has been prolonged till Q1FY18 is technically not short-term in nature or even transient,” said SBI group chief economic adviser Soumya Kanti Ghosh in a research note. “Clearly, the economy is in urgent need of a fiscal push now to shore up growth,” said Ghosh. However, the Centre’s fiscal deficit at the end of July touched 92.4% of the Budget target, thanks to front-loading of expenditure by various departments following the advancement of the Budget by almost a month. Direct tax revenue growth is satisfactory (though not spectacular as aspired for by policymakers after demonetisation) and the hopes are that the GST will boost receipts in coming months. However, if revenue growth remains muted, the fiscal space available this year is limited unless the government wants to breach the 3.2% deficit target.