Consider, for instance, the trend in revenues from indirect taxation, which in the era before the goods and services tax (GST) included customs, excise and service tax. These totalled 4.4 per cent of GDP in 2013-14, and climbed subsequently as the new government used the sharp fall in oil prices to increase petroleum taxes. By the time the GST
was introduced three years ago, indirect taxes had climbed to 5.4 per cent of GDP. The worrisome aspect is that this fell in the subsequent two years to 4.9 per cent and then 4.8 per cent. This was before Covid-19 really hit.
At the same time, non-tax revenue
and capital receipts fell off a cliff. Taken together, these accounted for 6.8 per cent of GDP in 2013-14; last year, the revised estimates put them at no more than 4 per cent. Capital receipts in a decade have fallen progressively from 7 per cent of GDP to 2 per cent. These trends reflect (among other things) the inability to continue milking the telecom sector, and the failure to get the disinvestment programme going.
The result is that the government’s total receipts, which at their peak a decade ago were 15.8 per cent of GDP, have fallen to barely 12 per cent. The only bright spot on the revenue side is the resilience, indeed slight buoyancy, in direct tax revenue – both income tax and corporation tax. Indeed, to the extent that the fall in indirect tax revenues reflects cuts in GST
rates (which can be reversed, preferably along with a unification of rates), the bigger problem is not with tax revenue but with other revenue sources.
For a while, expenditure followed the revenue trend by shrinking in relation to GDP, helped by lower petroleum subsidies, but it has started climbing again — and this is without counting off-Budget expenses. Given that new spending programmes have been introduced (for instance, health insurance and cash payments to farmers), there is also increased rigidity on the expenditure side.
The government has chosen to respond to the problem in two ways (other than the off-Budget business). One has been to ask for bigger dividends from the Reserve Bank and state-owned undertakings. The other has been to raise petroleum taxes even further, something that the Congress has chosen to criticise. However, given the overall fiscal situation, and the fact that cost-push inflation is virtually absent, this is an entirely sensible course to adopt. A third choice may soon be to stop further capital infusion into government banks, which will be asked to take care of themselves or get privatised. Whether either is a solution is doubtful, but it reflects the kind of sub-optimal decisions that may start getting made.