The wages of slowdown: Govt's coffers are running dry

By R Jagannathan

The Central government is fast running out of cash. With details about advance tax collections still under wraps, the government sprang a surprise on the money markets on Monday by announcing a Rs 15,000 crore borrowing plan for 30 December.

While the move has been officially explained as compensation for the withdrawal of an earlier Rs 4,000 crore government bond auction, what it actually underlines are two realities: revenues are simply not holding up in a year of slowdown, even though the government’s expenditures - especially on subsidies, current and future - show no signs of abating.

[caption id=“attachment_166711” align=“alignleft” width=“380” caption=“If disinvestment is showing up a near Rs 40,000 crore shortfall, tax revenues are likely to come up short by a similar amount - making Rs 80,000 crore in all. Reuters”]  [/caption]

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Another sign of desperation is the feverish efforts going into raising non-tax revenues. With the year’s disinvestment target of Rs 40,000 crore going for a toss due to poor market conditions, the government is trying to raise this money by fair means or foul.

Among the options being considered: disbanding the Special Undertaking of the UTI (SUUTI), pledging the shares it owns with banks, and raising money to buy public sector shares from the government. Another option: forcing cash-rich public sector units like ONGC and Coal India to disgorge higher dividends.

If disinvestment is showing up a near Rs 40,000 crore shortfall, tax revenues are likely to come up short by a similar amount - making Rs 80,000 crore in all. This is what explains the sudden need to borrow unscheduled quantities of money from the market.

Between April and November, direct taxes have disappointed while indirect taxes have looked more buoyant.

According to figures published by Business Standard, in these eight months, corporation tax has been a mere 40.63 percent of the year’s budget estimate when it should have been closer to 66 percent. Income taxes have yielded 51.48 percent, but still short of what a proportionate share of the year’s expected yield should have been.

On the other hand, indirect taxes have held up better - with 63.48 percent of the budget estimate being received in April-November. The star contributor was service tax, where collections crossed 70 percent, with customs yielding a healthy 65.96 percent. The discordant note has been struck by excise - which shows a collection of just 57.54 percent.

Three broad conclusions can be drawn from these numbers.

First, the relative weakness in direct taxes suggests that both corporations and individuals are feeling the heat of a slowdown, with income growth decelerating. Cost inflation and forex losses have eaten into corporate profits.

Second, the relative buoyancy of indirect taxes is partly the positive fallout of inflation. Since indirect taxes are levied on an ad valorem basis, higher prices result in higher taxes. This is especially true of customs, where rising imports of oil and commodities are price-inelastic. Gold and silver, which accounted for over$ 40 billion of imports, have added to the customs buoyancy.

Third, the divergence between customs and excise trends reflects the effect of a depreciating rupee (which raises customs revenues), and the domestic slowdown in manufactured products (due to higher costs and falling demand). The slowdown has affected industry more than services - as indicated by the robustness of service tax collections.

Some of the revenue shortfalls are directly attributable to policy failures - like the inability to reduce the oil subsidy bill by freeing diesel, cooking gas and kerosene prices. Net result: Indian Oil has not paid a rupee in tax this year, and BPCL, after paying a token Rs 35 crore in July-September, has skipped in the third quarter.

Given this situation, and given the big-ticket social sector schemes (Food Security, etc) coming up for execution in 2012-13, the government has only two choices: borrow more, or tax more. With the fiscal deficit of 4.6 percent of GDP already written off as unattainable, we could well see a bit of both next year.

The answers will be known in the next budget.