Will rising tax collections alleviate the fiscal deficit? - Views on News from Equitymaster

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  • Apr 6, 2000 - Will rising tax collections alleviate the fiscal deficit?

Will rising tax collections alleviate the fiscal deficit?

Apr 6, 2000

The sharp rise in tax collections (up 19.7% year on year) is sure to spark off talk of the possibility that the government will meet its fiscal deficit target of 5.1% of GDP for the current year. It makes sense to treat such optimism with caution.

The reasons for this are not far to seek. First, while working out the budget for the coming year, the government has taken into account tax collections of Rs 2,040 bn, implying a growth of over 20%. Thus, only if the tax collections were to grow much faster than this would the fiscal deficit actually reduce.

The most important aspect is the expenditure side of the budget. Although the government has initiated measures to reduce the subsidy bill, it is unlikely to be met due to political connotations. Other heads of expenditure including administrative and defence too are likely to exert an upward pressure on the deficit.

The rise in tax collections is definitely a healthy sign. Whether it will flow to the bottomline of the government is however both uncertain and unlikely.

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