Soumya Kanti Ghosh: Why unlearning is important

A point of view can be a dangerous luxury when substituted for insight and understanding.” So goes the saying. The problem is, when a point of view is unsubstantiated by data (as it is commonly in the Indian context), it becomes a sort of repetitive analysis. This is exactly what has happened with the Central Statistical Organisation (CSO) advance estimates (AE) of gross domestic product (GDP) for FY17 and the recently released government tax collection figures.

First, a word on the CSO estimates. There are some inconsistencies regarding the CSO GDP estimates, which we must know. First, the CSO has estimated that FY17 GDP growth would be around 7.1 per cent after it expanded by 7.2 per cent in H1 FY17. This translates to 6.1 per cent growth in Q3 and 7.8 per cent growth in Q4. This means that contrary to widespread public perception, the impact of demonetisation may have been (inadvertently?) reflected in Q3 data, but the 7.8 per cent growth in Q4 is quite unrealistic. Interestingly, it has never happened in the past that GDP jumped by 1.7 percentage points between two successive quarters (it happened in Q1 and Q2 of FY13 but that was due to base change). These are the dangers of projecting GDP based on past data.

Second, the 7.1 per cent growth in FY17 is based on the provisional estimate (PE) of FY16, not on the first revised estimate (on which it should have been) of FY16. This means that when the CSO releases the PE of FY16, the first AE estimate number of 7.1 per cent may change consequently. We hope the CSO also provides the government with the revised estimates of FY17 separately before the Budget is presented. It is surprising that the CSO did not oblige with the revised estimates of earlier years, as has been the custom. Possibly, this could be because of time constraints.  

Third, there is inconsistency in the estimates provided by the CSO and Reserve Bank of India (RBI). The central bank, in its fifth bimonthly policy, cut FY17 gross value added (GVA) projection by 50 basis points (bps) (Q2: 35 bps + Q3: 15 bps) to 7.1 per cent. However, the CSO has increased its nominal GDP estimate by Rs 1.27 lakh crore to Rs 152 lakh crore, compared to the assumptions provided in the FY17 Budget document.

Despite all this, the CSO numbers are still a blessing in disguise. At 11.9 per cent for FY17, the numbers are the ideal foil for a Budget that could please all. For example, while preparing the Budget for FY18, if the government assumes a nominal GDP growth of 12 per cent, then maintaining the same level of fiscal deficit as a percentage of GDP in FY18, at 3.5 per cent, could give the government an additional fiscal expansion of Rs 61,000 crore. In a situation of demand slowdown, these numbers could be ideal justification for the government to kick-start the economy through additional spending or tax concessions. A nominal GDP lower than 11.9 per cent could only make this number look better.

Apart from the Rs 61,000 crore booty, there is another good news, with tax collections during April to December 2016 increasing substantially. Among the direct taxes, personal income tax (PIT) has increased by 24.6 per cent during April-December 2016, compared to last year’s growth of 1.7 per cent. Excise duty and service tax collections also surged by 43 per cent and 23.9 per cent respectively during April-December 2016.

Again, we need to look through the numbers carefully to interpret this substantial increase. First, we believe the rise in PIT collections is also because of revenues from the Income Disclosure Scheme (IDS) of the government. However, even after adjusting the tax portion at the rate of 45 per cent of IDS, PIT collections would have still expanded by 16.7 per cent to Rs 2.2 lakh crore, a healthy trend. One possible reason for the continued buoyancy in income tax collections is that the number of direct tax instalments has now been increased to four times a year from the earlier three.

However, the most defining tax collection is perhaps the 43.1 per cent jump in excise taxes during April-December FY17. The government has estimated excise tax collections of Rs 3.18 lakh crore, out of which Rs 2.79 crore has already been collected by the government during April-December 2016.  

What are the possible reasons for such a significant increase? Based on petrol and diesel consumption trends during April-December 2016, we estimate that petroleum products contributed 15.4 per cent and others 27.7 per cent to the Union excise growth of 43 per cent during April-December 2016, compared to 38.1 per cent and 24.8 per cent respectively in April-December 2015. This means the contribution of petro products to the total excise tax collections is declining over the years — again, a trend that we all need to know. If this is so, the recent spurt in excise duty collections is clearly due to some other components other than petro products (the growth rate of such is well in excess of 50 per cent in the same period). 

What are these additional components? These could be excise collections on cement, automobile (infra cess), iron and steel, gems and jewellery (additional excise). It is also possible that some of the purchases on these products could have been frontloaded with the use of specified bank notes. 

What could be the additional “x” factor in the excise collections till date? We believe demonetisation has resulted in possibly a large number of accounts being opened by small companies to deposit cash/tax collections. The benefits of opening such accounts may result in providing momentum to tax collections in the years ahead by broadening the tax base. Also, with the CSO now incorporating MCA21 data to estimate GDP, these numbers may also provide a permanent upside to GDP. 

Clearly, the story of demonetisation is still unfolding.
The author is group chief economic advisor, State Bank of India. Tapas Parida and Sumit Jain contributed to the article


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