New Delhi: India’s Finance Ministry has delivered a challenge to its revenue collectors: meet tax targets despite $20 billion of corporate tax cuts.
Through a video conference on Dec. 16, officials were exhorted to meet the direct tax mop-up target of 13.4 trillion rupees ($187 billion), a government official told reporters. Collection in the eight months to November grew at 5% from a year earlier, against the desired 17%.
The missive shows Prime Minister Narendra Modi’s urgent need to buoy public finances in a slowing economy where April-November tax collections were half the amount budgeted. Authorities withheld some payments to states and have capped ministries’ expenditure as the fiscal deficit ballooned beyond target.
The government’s efforts to maintain its deficit goal goes against advice from some quarters, including central bank Governor Shaktikanta Das, who urged more spending to spur economic growth.
It’s uncertain though how much room Modi’s administration has to boost expenditure, given that it may already be borrowing as much as 540 billion rupees through state-run companies, a figure that isn’t reflected on the federal balance sheet. Uncertainty about public finances pushed up sovereign yields in November and December, compelling Das to announce unconventional policies to keep costs in check.
Read about India’s RBI buying longer bonds and selling shorter ones
“This is not a time to conceal the fiscal deficit by off-budget borrowing or deferring payments,” said Indira Rajaraman, an economist and a former member of the Reserve Bank of India’s board. “If they were to stick to the target, that would be catastrophic because there is so much pump priming that is needed right now.”
India’s gross domestic product grew 4.5% in the quarter ended September, the slowest pace in more than six years as both consumption and investments cooled in Asia’s third-largest economy. Only government spending supported the expansion, piling pressure on Modi to keep stimulating.
S&P Global Ratings warned in December it may downgrade India’s sovereign ratings if economic growth doesn’t recover.
Government support seems to be waning now, with ministries asked to cap spending in the final quarter of the financial year at 25% of the amount budgeted rather than 33% allowed earlier. This new rule will hamstring sectors including agriculture, aviation and coal, where not even half of annual targets have been disbursed.
As the federal government runs short of money, it’s been delaying payouts to state administrations. Private hospitals have threatened to suspend cash-less services to government employees over non-payment of dues, while a builder informed the stock exchange about delayed rental payments from no less than the tax office itself.
The biggest take home from Pre- Budget discussion of FMs is suggestion by Bihar and Kerala to raise the fiscal deficit limit to 4 %. It was agreed to large number of states. In current year real expenditure of states will decline- a crazy macro outcome in time of recession.
— Thomas Isaac (@drthomasisaac) December 18, 2019
India is considering a litigation-settlement plan that will allow companies to exit lingering tax disputes by paying a portion of the money demanded by the government, the Economic Times newspaper reported Saturday. The move will help improve the ease of doing business besides unlocking a part of the almost 8 trillion rupees ($111 billion) caught up in these disputes. The step, which is being considered as part of the annual budget, could also bridge India’s fiscal gap.
Finance Minister Nirmala Sitharaman has refused to comment on the deficit goal before the official budget presentation due Feb. 1.
A deviation from target, if any, “will need to be balanced with a credible consolidation plan further-out,” said Radhika Rao, an economist at DBS Group Holdings Ltd. in Singapore.