Income Tax and Government of India - Solve the mathematical puzzle!

I compliment the Finance Minister for achieving the fiscal deficit target of 3.9 per cent in the current year and fixing a target of 3.5 per cent for 2016-17. That one decision has lent a measure of credibility to the government’s professed commitment to the path of reform.

There are, however, questions about the fiscal math of the budget.

Let me go back to my column titled ‘Oil Windfall: Gone With the Wind’ (10 January 2016). The budget documents have confirmed the initial estimates. The government reaped a windfall of about Rs 1,40,000 crore due to the decline in crude oil prices. The bulk of the gain has been used in the following manner in 2015-16:

Gap in Direct Tax Receipts: Rs 46,000 crore

Gap in Other Receipts: Rs 44,000

Lower Borrowing due to Lower Nominal GDP: Rs 20,000

A missed opportunity

As I had feared, no part of the windfall has been used for additional capital expenditure or socially useful programmes. In fact, total capital expenditure has fallen from Rs 2,41,430 crore in the budget estimates to Rs 2,37,718 crore in the revised estimates.

It was a missed opportunity. If the government had collected its budgeted direct taxes and had achieved its disinvestment target, it could have used a substantial sum for additional capital expenditure. That would have given a big boost to aggregate demand. So, while the government met the fiscal deficit target of 3.9 per cent, it was achieved in an unsatisfactory manner — so, no high marks for fiscal management.

Let us now look at the fiscal deficit target of 3.5 per cent fixed for 2016-17.

Total receipts and total expenditure will be up from Rs 17,85,391 crore in 2015-16 (RE) to Rs 19,78,060 crore in 2016-17 (BE). That is a huge jump of Rs 1,92,669 crore. Of the total expenditure, Rs 5,33,904 crore will be financed by borrowing (the fiscal deficit) which is about the same level as the borrowing in 2015-16 (Rs 5,35,090 crore).

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The fiscal math puzzle How does the government propose to garner additional resources of Rs 1,92,669 crore? This is where the math becomes a puzzle. From the budget documents, the following appear to be the main sources (the numbers have been rounded off):

Net Tax Revenue: +Rs 1,07,000 crore

Non Tax Revenue: + Rs 64,000

Other Receipts: + Rs 31,000

These are ambitious projections of increases in receipts. The assumptions are that direct tax receipts will grow by 12.6 per cent as against 8.3 per cent in 2015-16; spectrum auction will bring in an additional Rs 42,000 crore which will boost Non-Tax revenue; and isinvestment will yield an additional Rs 31,000 crore over the level achieved in 2015-16. If these assumptions must be proved to be correct, it will require extraordinary capacity and drive in the Department of Revenue and the Department of Disinvestment. It will also mean that the telecom service providers will be ready to stake more money for acquiring spectrum.

What is of concern is that, should the assumptions prove to be incorrect, there does not seem to be a Plan B. Will the government cut subsidies or other expenditure? There are already complaints of insufficient allocation to the social sector. Nor is there scope to cut defence expenditure. Perhaps, some payments may be staggered while implementing the Pay Commission report or the One Rank One Pension scheme — both beehives.

The other doubtful part of the fiscal math is the growth of GDP. In 2015-16, nominal GDP grew by 8.6 per cent. The assumption for 2016-17 is that nominal GDP will grow at 11 per cent. The revenue estimates (both tax and non-tax) are crucially dependent on GDP growth. We may keep our fingers crossed.

Off-budget borrowings
There is another aspect of the budget that affects the credibility of the fiscal math. These are estimates of borrowing by the Ministry of Railways and the Ministry of Road Transport. Such borrowings, called ‘extra budgetary resources (EBR)’, have been kept outside the balance sheet of the government. In the case of Railways, the EBR is projected to jump from Rs 48,700 crore in 2015-16 to Rs 59,325 crore in 2016-17 and in the case of Road Transport from Rs 28,000 crore in 2015-16 to Rs 59,279 crore in 2016-17. Apart from the capacity to borrow, the wisdom of such off-budget borrowing is open to question. The correct approach would be for the government to borrow and provide the funds to the two infrastructure ministries in the form of budgetary support. Borrowing large amounts by the two ministries (or their public sector arms) may be unexceptionable in terms of accounting but is not likely to go down favourably with the eagle-eyed analysts and rating agencies. I shall not be surprised if they will add these extra budgetary borrowings to the overall fiscal deficit!

The fiscal sum (3.5 per cent) is indeed the right answer, but the fiscal math is puzzling.

Website: pchidambaram.in

India Budget Fiscal Year 2017

The budget's changes on tax and duties changes are credit positive for energy and commodity producers, but negative for automakers. Changes to levies on crude oil will lower cash production costs for national oil companies, but will not compensate for the impact of lower oil prices.

Finally, the budget is positive overall for India's securitisation markets as changes in the distribution tax norms for securitisation trusts will improve investors' post-tax returns and make investments in securitisation products more appealing, which could attract a new class of investors to the asset class.

Achieving the fiscal deficit target of 3.5% will be challenging if the GDP growths of past years are revised downwards. The CSO wing of Govt of India started a new methodology of GVA using International Standards, foregoing the previous sample method. Since this is a new scheme, there could be potential downward revisions possible this year in 2016.

India did not reduce the Gasoline and Diesel prices in accordance with the lower crude oil price which dropped significantly over the past 18 months. When the crude oil prices head upwards, the govt might run down to lose revenue if it were to keep the gasoline and diesel prices at current levels.

The infrastructure spending roads alone will not boost the nation's GDP growth, as expected by the many economists. There is a disconnect of world's other developed nations and India in highway and roads usage pattern. Even when you build world class highways, 80% of trucks on highway do not engine capacity to go beyond 35mph speed. Having this underlying archaic issue of truck speeds, any amount of highways building in India will not result in speedier movement of goods and services any time soon in the next 10 years. 

The Finance Minister has chosen to supply Dialysis equipments and services in health care programme. This is a notorious issue in India. The Central Government keeps announcing new scheme and freebies to Indian citizens on healthcare support. However, many state governments already in the process of offering free Health Care insurances. There seems to be no cohesiveness between central and state governments to design, equip, modernize and deploy sophisticated healthcare programme for the nation. 

No specific Infrastructure proposal has been announced for Major City traffic congestion. Numerous studies have shown the GDP loss due to traffic congestion would be in the ranges of Rs 200 Crores to Rs 20000 crores in Metro cities. 

Banks get a big boost: Rs 25,000 crore towards recapitalisation of public sector banks. However, given the bad loans of Rs 1.3 Lakh crores, the amount Rs 25,000 crores is not enough. 

Where's promised cheap Gasoline after Crude Oil Plunged 50 percent?

From the August 2014 to August 2015, the Crude oil prices have dropped 60%. Where as the Gasoline for the same time has only dropped from $3.40 to $2.63, which is only 22% drop. What happened to promise that the cheaper Crude price means, cheaper gasoline? For the month of July 2015 at $2.70 a gallon, the EIA analysis shows that 46% is for Crude, 25% for refining, 13% distribution&marketing and 16% for taxes. So, what really happened? In California, the average price of regular gasoline across CA was about $3.90. That's only 10 cents lower than last July's average price in CA. This is even more mysterious as why the Gasoline price seem to have divorced from Crude oil price. We know that there a lag time of 3 months, from the crude oil price drop in the markets, to get the crude oil to refinery at the new market price. Here, the Crude oil prices have been continuously falling since last August. So lag time is not at play for not seeing the lower prices? So, what is the reason?
The bottom line: U.S. oil refineries have profited from processing cheap oil and passing only some of the savings to consumers.

PM Modi Visit to Dubai.

Dubai is fascinating place. First city in the world which created a 7 star Hotel! Mr Modi, the Prime Minister of India visited this today. Well, where does the economy of this state stands now? Well, not a promising one. Let's take the visit of Mr. Modi to Brazil last year!. After his visit, Brazil has entered in to recession this. Add to that trouble, the President Dilma Rousseff is facing impeachment call in the nation, today. He was in Russia recently. Russia was already in recession when he visited. Its getting worse now! Well, UAE is entering into recession now. Somehow, Prime Minister Modi seems to visiting the places, where the recession is arriving!. May be, he's got something that we do't know of. Only history will tell that!

India's $2T economy - How many Indians know about it?

7th July 2015.

World Bank reported last week that India's economy had reached $2 trillion, in the financial year 2014. There are only 9 countries in the world having economy size $2 trillion and over, including India. How does India compare to other indicators of remaining 8 countries in the list? Let's take look at Education or Literacy rate. All eight countries have literacy rate of 92% or higher. India's literacy rate is 74%. Even this rate is not reliable as the standards of measuring literacy rate in India is sub-standard.

I will not discuss three things. Firstly, GDP in PPP method. Most economists have criticized the PPP method of comparing nations is un-scientific. China refused to be part of World Bank's International Comparison Program since 2011. Secondly, per capita is also not discussed because the Indian economy is govt-centric. India's government spending is about 50% of the India's GDP. Most developed country's government spending do not exceed 17%  of their GDP, during peace time. They exceed this only during war time. Comparing per capita of India with other nations is muddy waters.
Thirdly, I do not subscribe India's fiscal deficit numbers portrayed in India's budget documents, they are considered as 'holy' in India. But, these documents are anything but holy!

So, how else India's development could be gauged/measured with unreliable data, un-scientific nomenclature and non-objective indicators?

How about most ambient and decorated indicator, "poverty rate"? Well, worldwide two major distinguished bodies report India's Poverty rate. 1. United Nations. 2. World Bank, and thirdly Indian Government's version of poverty rate. All these poverty rates have varying measures. Again, I'm confused as to which one is more accurate. This becomes un-scientific numbers among other indicators I discussed earlier.

Well, I am perplexed as to when will India even reach a point comparable to other nations, let alone becoming a super power or developed nation as many dream!?

To me, the $2 trillion milestone is yet just another number. Nothing matters to every Indian. Nothing is here to brag about!. It only reminds the hard work ahead for young nation India!. It has decades of steadfast developmental needs ahead in its journey!. People's life would not change much until such time!

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State of Tamil Nadu Economy from Budget 2015-16

Tamil Nadu government presented its budget to the assembly today. I did not have lot of motivation to study details of budget, because Tamil Nadu is gloomy as we all know from Mr. Panneerselvam is a proxy Chief Minister of Tamil Nadu. And we all know the government apparatus is just hanging there to collect the monthly pay checks.!

The revised estimate of Revenue for current year 2014-15 is reduced to Rs. 85,772 from original budget of Rs. 91,835. The reduction is Rs 6063. In Last year's budget, TN govt projected 10% growth in its Revenue. However, the government only achieved 2.9% revenue growth. 

What does this mean? If you subtract the inflation to bring the Tax Growth to constant prices, the net Growth of Tax revenue is Negative? 

If state GDP is grown around 10 as per the Statistics, why would the Revenue growth is only 2.9%?

This tells the pathetic state of Tamil Nadu economy. I believe the Tamil Nadu's economic growth, after adjusting to Constant prices, would be in negative. Tamil Nadu is in recession. But, no one wants to admit it yet. 

Budget FY16 - Hidden facts unearthed.

1. For the current year FY15, the original projected Tax Revenue was Rs. 977258 Crores. But the revised revenue is set at Rs. 908463 Crores. This amounts to a whopping 43% Revenue shortfall over the budgeted Revenue Growth. If the GDP had grown at 7.4% above the original prediction as per released statistics of CSO , can the Finance Minister explain why then there is a shortfall  Rs 69,403 crores in tax revenue, which 7.1% lower than projected Tax Revenue of Rs 9,77,258 Crores?

2. For the next Fiscal FY16, FM projects the GDP will grow at 8% range. If he truly believed it, why then he projected only 1.2% revenue growth ie. Rs. 919842 Crores against this year's Rs 908463 Crores?  Can any Economist explain this. When GDP growth is 8% in a developing country, Govt Tax Revenue will grow only 1.2%?  This sounds really weird.

3. The above two items are of paramount important in any nation's Budget. If we are missing explanation for this ambiguity, how much can one believe the rest of the budget documents?