The latest factory output and wholesale price inflation numbers (both in the negative for December and January, respectively) reinforce the view — endorsed by the mid-year review of the economy — that contrary signals in a fast-growing economy cannot be brushed aside. Besides, the second advance estimates of foodgrain output for 2015-16, at 253 million tonnes, point to a growth of barely 0.5 per cent, owing to higher wheat and pulses output. Sugarcane, cotton and oilseeds output are estimated to be lower than in 2014-15; this raises doubts on whether an agriculture growth rate of 1.1 per cent estimated in the ‘advance’ GDP estimates for 2015-16 can be achieved. An economy propelled by trade, restaurants and financial services rather than the core productive sectors seems like one that is moving up from the lower end of the business cycle — even as its macroeconomic fundamentals are sound. The difference between the growth estimates of ‘gross domestic product’ and ‘gross value added’ (the latter showing a growth of 7.3 per cent this fiscal and the former 7.6 per cent) is explained by the surge in indirect tax collections this fiscal. But it is hard to fully accept the Centre’s reasoning that this mop-up is proof of strong growth impulses. A spurt in customs revenue from machinery imports as well the higher service tax mop-up from transportation and banking is a positive development. However, higher collections can also be traced to the hike in excise levies on petroleum products and cesses, such as that imposed for Swachh Bharat. Direct tax collections are below target, with personal and corporate tax collections having grown by 11.9 per cent and 10.4 per cent, respectively, between April and January. An added cause of concern is that nominal growth of GVA, at 6.8 per cent for the April-December period, trails real growth (suggestive of deflationary tendencies), and is way below the estimate of 11-12 per cent built into last year’s Budget arithmetic. A nominal growth rate that is lower than the government’s cost of borrowing will add to its debt service burden.
In this climate of apprehension, the Budget’s revenue estimates should be based on credible growth assumptions. Given the extraordinary turbulence in financial markets, which is likely to be a feature of 2016, an ambitious disinvestment target does not seem like a good idea. Assuming a tax buoyancy of about 1.5 for the Indian economy (the growth in tax revenues as a proportion of GDP growth), indirect and direct tax collections, taken together, should aim at a growth of about 15 per cent in 2016-17, given a nominal growth rate of, say, 9 per cent. A shift in the focus of tax collection from indirect to direct taxes is called for, as the former hurts the poor more.
An intelligent approach to fiscal consolidation is needed — one that maximises long-term returns on investment, more so when nominal growth poses a problem. A public investment stimulus in high-multiplier sectors such as railways could make a difference. Investment in education, innovation and health should be seen as enhancing long-term growth prospects.