India has followed a path of gradual fiscal consolidation from FY12 after it became apparent that the fiscal stimulus to boost the manufacturing sector to avert the collateral damage of global financial recession was becoming highly inflationary.
While the government’s indirect tax collections remain buoyant because of higher oil tax revenues, a sharp drop in nominal GDP growth has resulted in a shortfall in direct tax mop up in the current financial year. As a result, tax buoyancy has not gone up significantly.
The government has increased the excise duty on petroleum products thrice in this fiscal and imposed an additional cess on service taxes. Collections from excise duty have touched Rs 1,46,324 crore till FY16 November, which is a jump of 70% as compared with Rs 85,925 crore collected during the same period in the last fiscal. In the eight months of this fiscal, the government has already achieved 64% of the budgeted estimate in excise, much higher than the 48% achieved during the period in the last four years. Similarly, service tax grew 24% y-o-y and 55% of the budgeted target.
However, the Centre is likely to face a gap in direct tax collection this fiscal as the mop-up in first eight months has been slow, at 46% of the budgeted target of Rs 7.97 lakh crore. During April-November, direct taxes, which include income tax and corporate tax, grew 12.63% to Rs 3.69 lakh crore. Corporate taxes grew 8.2% y-o-y as revenue and profit of corporate India have been moderating because of the slowdown in both urban and rural consumption and falling global commodity prices. It is likely that the shortfall in direct taxes will be met by the robust growth in indirect taxes.
India has followed a path of gradual fiscal consolidation from FY12 after it became apparent that the fiscal stimulus to boost the manufacturing sector to avert the collateral damage of global financial recession was becoming highly inflationary. Although the current budget pushed the medium-term fiscal roadmap by a year—fiscal deficit at 3% of GDP by FY18—the quality of Centre’s fiscal spending has improved, with more emphasis on public investment. Growth in plan capital expenditure, or spending on building capital assets, has been 57% for the April-November period, while the growth in non-plan revenue expenditure, which is mostly spending on consumption and subsidies, has been only 8.6% y-o-y.
In fact, Morgan Stanley estimates that currently on a 12 month trailing sum basis, fiscal deficit is at 3.5% of GDP as compared to the government’s target of 3.9% of GDP for FY16. It expects FY16 fiscal deficit to come in marginally below the target, at 3.8% of GDP, due to supportive factors such as an increase in oil excise duties, service tax rate and lower oil prices.