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Economy: What if? - Views on News from Equitymaster
 
 
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  • Jul 19, 2004

    Economy: What if?

    The UPA government, in the recently announced Union Budget for 2004-05, indicated its thrust towards the rural economy and high investment for growth. Despite high allocations on these heads, the government aims to maintain fiscal discipline. Simply put, it has projected a revenue deficit of 3.1% for 2004-05, lower than 3.7% as was estimated by the previous NDA government.

    UPA: Expecting a larger coffer!
    (Rs cr.) NDA UPA % higher
    Tax Revenue 220,132 233,906 6.3%
    Non-Tax Revenue 70,749 75,416 6.6%
    Disinvestment 16,000 4,000 -75.0%
    Gross Borrowings 139,764 164,763 17.9%
    Total Receipts 450,522 524,232 16.4%

    The main reason for the UPA government's lower revenue deficit estimate is its expectations of higher tax and non-tax revenues this year than was estimated by the previous government (see table above). However, these expectations have a big caveat.

    When we break up the tax revenue as estimated by the UPA government, the top two contributors, i.e., excise duties and corporation tax, are likely to rake in growth of 18% and 40% over 2003-04. This, the government has assumed on account of high growth of the Indian economy (thus growth in trade and high excise income), and rising profitability of Indian corporations (thus growth in corporation tax income).

    Where will the taxes come from?
    (Rs cr.) 03-04 04-05 Change
    Corporation Tax 62,986 88,436 40.4%
    Customs 49,350 54,250 9.9%
    Excise Duties 92,379 109,199 18.2%
    Service Tax 8,300 14,150 70.5%
    Total Tax Revenue* 187,539 233,906 24.7%
    * Excludes states' share

    Now, even when we consider the current momentum of growth of the Indian economy, such high growth expectations of 25% YoY from tax revenues seem lofty. This is considering the fact that in the last decade, the highest growth in tax revenues stands at 23% that was achieved in the year 1999-00 and the average growth comes to a meager 13%. The pressure on the government finances is also magnified because of the fact that while average growth in non-tax revenues for the last decade has been 12%, but the growth expected by the government in 2004-05 is a negative 0.1%. Thus, the entire onus of receipts is on the tax revenue front, which if something goes wrong, can leave the country's financial position in a state of flux.

    Now, let's focus on what some of these 'wrongs' might be.

    The 'what ifs'...

    1. Uncertain monsoons: A large dependence of profitability of the Indian industry on rural demand makes the whole situation even more uncertain, considering the fact that monsoon, which largely determine income for the rural population, have not shown signs of normalcy this year. If something goes wrong on this front, India Inc.'s profitability and consequently the government's corporation tax estimates can go awry.

    2. Political concerns: Then there are political concerns emanating from the reservation shown by the government's Left partners on the FDI policy. If the government with its Left partners continues to get involved in solving their respective ideologies, rather than taking stock of the management and administration of the economy, it may slow its reflexes in responding to a given fiscal situation. Consequently, growth might suffer thus putting pressure on the fiscal.

    3. Inflationary pressures: Inflation, which has crossed the 6% level, is a big cause of worry for growth of the economy. Rising prices on account of rising input costs might put additional burden on India Inc.'s profitability, thus derailing the government's objective of meeting its tax targets.
    These factors, and some more like global economic slowdown led by China and geopolitical tensions, are big caveats in the government's path of meeting its revenue projections. On the qualitative aspect of it, the allocated expenditure, if not directed properly towards whom they are meant for (read, the poor), will render the purpose of the entire budgetary exercise a farce. As always!

     

     

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