India has tremendous growth potential, but right now it’s tied by a triple lock of subdued tax and non-tax revenue, widening deficit thanks to rising crude oil prices and weak investments stalling the economic turnaround. As PM Narendra Modi once admitted, his lucky charm did help the GDP in the form of low crude oil prices in the past two years.
But 2018 may see a trend reversal as rising oil prices can impede economic recovery, and spike inflation, CAD and fiscal deficit. The RBI too raised its inflation projections to 4.2-4.6 per cent by March citing hardening oil prices and uncertainty from kharif crop output.
Investments aid growth, but there isn’t as much money among corporates or in the treasury coffers as the government would have hoped. Our finances aren’t going to hell in a handcart, but tax and non-tax revenue data are nevertheless disappointing. Indirect tax collections are subdued and may remain so as GST gets streamlined.
Direct tax collections are lower than anticipated due to weak corporate earnings and fell to a decade-low of sub-50 per cent (of total tax collections) in 2017. Non-tax revenue too joined the sorry parade, with the RBI’s surplus transfer lower than anticipated, raising the risks of fiscal slippage. Disinvestment proceeds—target-bound for the first time in history—and higher dividends can offset the revenue shortfall, but only partly.
In a slowing economy, textbook theory tell us that Keynesian solutions are needed, which is to borrow more to invest, but rating agencies are gaslighting us that increased government spend is harmful. Finance Minister Arun Jaitley may avoid politics or populism in the treasury spreadsheet, as revenue-side economics has a tyrannical grip on our finances.
Demonetisation did turn electoral lead into gold in UP, but there’s little room for economic reforms or tax-and-spend policies in 2018—a year full of polls. In short, Jaitley approaches the upcoming Budget from a position of vulnerability. Will he manage to pull a rabbit out of his hat or deliver a do-nothing budget? We shall know soon.