Tax Deficit & Plans Ahead

By Shivam Saklani

India could be forced to cut spending on major investments such as Railways & Highways due to lower than expected tax collections and sluggish growth, which have impeded the government’s credit.

India is largely a domestic consumption driven economy, which took a massive hit, over past 2 quarters, after the government demonetized high values currencies. A major tax overhaul in the form of roll out of GST also disrupted the consumption cycle as manufacturers went in for massive destocking before new tax rates were enforced.Tax receipts were about 2.8 billion in July, a little over half, of the monthly target, mostly because millions of the firms failed to comply with the new GST Systems. Revenue shortfall, at the end of the fiscal year, could also be at least 800 billion rupees if the current trend continues.

Aiming to boost growth amidst the revenue shortfall, Finance Minister Mr. Arun Jaitely, to everyone’s surprise, increased budgetary allocation for railways by one-fifth to 550 billion rupees, and by 24% for highways’ development. Complicating the finance ministry’s budget arithmetic, the RBI announced last month, that its annual surplus, a dividend transferred by central bank to the government, to be only 4.9 billion dollars, less than half the initial estimate.

The government has now sprung up into action, as the ruling party now gears up for crucial state elections, including that of PM’s home state in a year and general elections in less than 2 years. The government wants to give people a new reason to vote for them. A need is now being felt in the power corridors of the nation, for a push which could bring economy back on the track. Ministries have been told to submit their budget estimates by September 30 and discussions regarding it would be held from October 1.

With the union budget, likely to be presented in the parliament on February 1, The Economists expect another budget with huge allocations for projects in public sector to keep the Capex cycle going. Expecting the economy to return to high growth path, Nifty 50 index opened in the positive and made a new record lifetime high of 10,171 on Monday.

With the plan of bright future ahead, the government hopes to complete a few strategic deals of the government holdings in public sector enterprise by the end of the year, to cope for the tax deficit.