GDP slows, taxes surge. Deficit up, govt talks food bill
The raft of economic data coming out on Friday, along with the Kelkar report on fiscal consolidation, has added to the puzzle over where India’s policymaking is headed. Though the $2 billion y-o-y rise in private transfers in Q1—money sent home by NRIs thanks to a hike in interest rates—helped offset the contraction in exports by a similar amount and kept the current account deficit at around the same (high) 3.9% of GDP level, the more dramatic problem was the fall in imports and the dramatic slowing of service exports (they rose just $700 million in Q1). Along with a slowing in the core sector growth, this data is in keeping with economic conditions remaining poor. The fact that FDI inflows halved in Q1 reinforces this.
In which case, how have tax collections—albeit driven by direct taxes, not indirect—done so well? As compared to the full year’s 19.5% projected rise in gross tax revenues, April-August taxes grew 18.2%—with the collapse in GDP, most expected a much sharper slowing. Corporate taxes rose 26% in April to August—well above the targeted 14% for the year—even though profits fell 6% for a sample of 2,200 firms whose revenues rose just 14% y-o-y. What make the tax numbers even more inexplicable is the analysis of the Kelkar report based on data for the April-July period—Kelkar projects a slippage in the tax-to-GDP ratio from 10.6% projected in the budget to a likely 10.1%. Of the 1 percentage point slippage in the deficit for FY13, Kelkar projects half from the tax slippage and half from the increased expenditure, primarily on subsidies.
Even more perplexing is the government response to the Kelkar report. The fact that the government didn’t raise its borrowings targets for the second half of the year—the calendar was announced on Wednesday—suggested the government was likely to take action based on the Kelkar recommendations. Kelkar has recommended eliminating half the diesel subsidy this year and the balance over next year; LPG subsidies are to be eliminated by FY15 and ditto for a third of kerosene subsidies. Without this, Kelkar points out there is no hope of reaching fiscal deficit targets. In a business-as-usual scenario, Kelkar says the additional oil subsidy burden for the government in the first 9 months of the year will be R52,000 crore. The problem, however, is that the government issued a press release with the Kelkar report which says while the report is under consideration, “some recommendations appear contrary to the declared objective of … sustained and inclusive growth”. The same release also talks of the government’s commitment to implement the food security bill—a point reiterated by food minister KV Thomas saying on Friday that the bill would be brought in the winter session. And yet, the PM also announced the architecture for cash transfers to reduce wastage in subsidies. The pulls and pressures of populism and reforms are getting more apparent.