But rise net tax collection points to revival

The Government’s attempts to keep the fiscal deficit within the budgeted target appear to be falling flat, if the current fiscal’s first seven months numbers are any indicator.

According to data released by the Controller General of Account (CGA), the deficit in the first seven months of the current fiscal touched Rs 4.58 lakh crore against the target of Rs 5.42 lakh crore. This is 84.4 per cent of the target against 71.6 per cent during April-October period of 2012-13.

This increase is due to low tax collections, while both Plan and non-Plan expenditure has gone up.

Fiscal deficit is mainly the difference between income and expenditure of the Government. Higher deficit means, Government will borrow more from the market. This can drain the liquidity from the market leading to increase in interest rates. This will impact the corporate sector as well as individuals.

Deficit at the end of September was 76 per cent of the target.

Positive signs

But, there is a ray of hope.

The data show some positive signs for the first month of second half of the current fiscal, which could lead the Government to be more optimistic about growth prospects going ahead.

This was reflected in the growth of net tax revenue in October which grew by over 22 per cent compared with October 2012 and is highest in the year so far. Corporate tax collection saw a 42-per-cent growth in October year-on-year.

Experts also feel optimistic about the rising trend in exports and rural demand. Both these are reflected in the manufacturing activities and tax collections.

However, experts feel that these positive developments may not have a large impact on the overall deficit.

“The Budget target of tax collection is 19.3 per cent and for first seven months, this has been around 6.8 per cent. So, to achieve the Budget target of collection, tax revenue will be required to grow at nearly 30 per cent, which is a difficult task,” D.K. Pant, Chief Economist with India Ratings & Research said.

He estimates the deficit for the whole year to be around 5.2 per cent.

Experts also feel that the current level of deficit will prompt the Government to cut expenditure.

However, “cautious approach to cutting expenditure with a focus on items which have less impact on domestic investment or a low multiplier effect is warranted. For example, expenditure on infrastructure or bank recapitalisation could be prioritised over other items such as defence. In such a way, the deficit could be contained this year while restricting the sacrifice of growth,” Aditi Nayar, Senior Economist with ICRA said.

shishir.s@thehindu.co.in

(This article was published on November 29, 2013)
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