New Delhi: Amid the political slugfest in a busy election season, an estimated shortfall of Rs 1.6 lakh crore in gross tax collection for 2018-19 will be a cause of worry for the Modi government.
The shortfall reflects a higher-than-anticipated economic slowdown, especially in the second half, said economists.
Last week, news daily Business Standard reported that the tax shortfall for 2018-19 was Rs 1.6 lakh crore — 0.8 per cent of India’s gross domestic product (GDP).
“The numbers indicate that there has been a slowdown in economic growth, especially in the second half, which has led to lower tax collection despite higher expectations. This also suggests that the tax collection target — especially for this year will be difficult to achieve,” Crisil chief economist D.K. Joshi told ThePrint.
Slower economic growth also has a direct impact on the job market — one of the most crucial issues this election.
ThePrint looks at the impact of the tax shortfall on the Indian economy.
The shortfall will make it difficult for the government to meet the fiscal deficit target of 3.4 per cent, which was set in the interim budget announced by railways and coal minister Piyush Goyal, who was then handling the finance ministry.
Fiscal discipline is critical to the maintenance of the country’s strong sovereign rating. Global ratings agency Moody’s has already marked India’s fiscal deficit target a “credit negative”.
The government has increased its expenditure substantially without chalking out any concrete measures for revenue generation. With tax collections falling short, the pressure will increase on the government.
Goyal, in the interim budget, had reset the target for direct tax collections at Rs 12 lakh crore from Rs 11.5 lakh crore for the previous year. However, collections slipped in the last two months of the just-concluded financial year. The government had also lowered goods and services tax (GST) collection target from Rs 7.43 lakh crore to Rs 6.43 lakh crore.
The Modi government had pegged the nominal GDP growth rate at 11.5 per cent for 2018-19. Based on this growth projection, it had set a higher tax collection target — basically, the higher the growth, the greater the tax revenue.
Nominal GDP refers to the economic output measured in current market prices — it does not adjust inflation. Real GDP takes inflation into account. Nominal GDP, therefore, is typically higher than real GDP, but real GDP reflects a more authentic picture.
Now with collections falling short, economists said that the growth numbers could be lower than envisaged.
Importance of nominal GDP growth projections
Nominal GDP, evaluated at current market prices, is used to determine key fiscal indicators, including fiscal deficit. An assumption of higher nominal GDP base helps the government to project better fiscal indicators.
For the current financial year too, the government has taken an assumption of a nominal GDP growth of 11.5 per cent. However, it has projected a tax revenue growth of 14.9 per cent while keeping the nominal GDP assumption unchanged, leading to many analysts and credit rating agencies to question the methodology.
Tax to GDP ratio
India’s tax to GDP ratio — tax revenue measured in terms of GDP — remained at 11.3 per cent in 2017-18, the same as the previous year. The government has maintained that it was critical to improve the tax to GDP ratio. The demonetisaton exercise and the implementation of GDP were expected to push the tax to GDP ratio.
“However, as of now, it doesn’t look encouraging,” said an analyst who did not wish to be identified.
Fiscal deficit target just optics?
A senior government official and an independent analyst on condition of anonymity said that the direct tax collection target may have been increased just as a symbolic projection to show that that the stiff fiscal deficit target would be met.
Besides, the projected increase in direct tax collection the government failed to project any other source that would generate revenue to keep the fiscal deficit bound at 3.4 per cent.
Pahle India Foundation’s senior fellow and head of research Nirupama Soundararajan said investments have been slow due to political uncertainty with general elections underway.
“Typically in an election year, there is a tendency for delaying investments and this will impact growth too. Once the new government is in place — depending on which party comes to power — investments will start picking up and that will push overall tax collections,” Soundararajan said.
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