Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: VAT RATES :: VAT Audit :: articles on VAT and GST in India :: TDS :: list of goods taxed at 4% :: empanelment :: cpt :: TAX RATES - GOODS TAXABLE @ 4% :: ARTICLES ON INPUT TAX CREDIT IN VAT :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: form 3cd :: ACCOUNTING STANDARD :: Central Excise rule to resale the machines to a new company :: due date for vat payment :: ACCOUNTING STANDARDS
News Headlines »
 CBDT simplifies ITR filing process from FY18
 Govt extends service tax return filing date to April 30
 No move to tax farm income, clarifies Arun Jaitley
 New board for indirect taxes to become operational from June 1
  9 changes that came into effect from April 1
 First time filing income tax? Here's all you need to know about Form 16 and Form 26AS
 New Opening Financial Controller Chartered Accountant (Manufacturing Plant) A Leading Company
 Income Tax Filing 2017: All you want to know about the single page ITR form SAHAJ
 How to benefit from investments in tax saving mutual funds
 60 per cent of income tax notices on fishy cash deposits returned
 All about income tax return form Sahaj

UPA govt's policies may halt India's growth
February, 24th 2009

Campaigning for his presidential bid, John F. Kennedy famously said that there are no free lunches in life. This aptly describes the current state of Indian economy, which was so far enjoying the gains of a cheap oil and fertiliser policy.

But, now its time to pay the lunch bill and the amount may cause a heart attack. And, this is what happened to the markets on the day of interim budget. The budget revealed the poor state of the central government finances and confirmed the markets worst fears.

For over two years now, the government has been following a cheap fuel and fertiliser policy, even as both commodities experienced a sharp rise in prices in the international market. The government achieved it by creating offbalance sheet liabilities, oil bonds and fertiliser bonds.

This enabled the government to transfer the pain to the coming governments. In the interim, the only cost is the interest payments. The policy also forced oil companies, which happen to be government-owned, to share the subsidy burden and make losses.

While the measures delayed the pain, it was achieved at the cost of long-term economic viability. While the liabilities arising out of bonds will reduce the fiscal manoeuvrability of future governments, cheap fuel, at all cost, has imperilled the financial viability of oil PSUs.

The latter is significant because, oil and gas PSUs have historically been a big source of non-tax revenue for the central government. This window is now closed for the foreseeable future.

It seems the UPA governments fiscal adventures were based on the belief that the good times will not end soon. The belief was, however, not entirely misplaced. In the last three years ended March 2009, the governments tax revenues expanded at a CAGR of 23%. The buoyancy was aided by 33% CAGR rise in direct taxes with both personal income tax and corporate taxes collection growing at a fast pace.

However, those were boom days and chicken has now come home to roost. The economy is slowing down and the very sources of tax buoyancy corporate profitability and salary growth in India Inc, are most at risk. This, in turn, may lead to a fall in corporate income tax.

Slowdown is also likely to adversely affect the salary growth in the organised sector, which will impinge on personal income tax. In the indirect tax side, customs revenue will be adversely affected due to a sharp correction in crude oil prices and a general slowdown or worse a decline in non-oil imports.

To add to the government woes, the Railways finances are now also showing the strains of last five years of populism and slowdown. The Railways operating ratio is estimated to have shot up to nearly 90% in 2009-10 from 76% in FY08. The situation may worsen further, if the downturn leads to a further dip in cargo availability. This may curtail the Railways ability to pay dividends to government and worse still, next rail minister may ask for grants from the general budget to fund various expenditure programmes.

So going forward, while sources of revenue are diminishing, expenses are not likely to fall, rather they have a tendency to rise as the government is expected to bring up slack from private sector by boosting various expenditure programmes. This will push up the fiscal deficit and may act as a drag on Indias economic growth. This is evident from the chart below, which shows the historical trend in Indias fiscal deficit and the economic growth since 1991.

As is evident from the chart, the current high growth phase was preceded by an improvement in the countrys fiscal situation. In contrast, high fiscal deficit regime of mid-90s was followed by a period of low and uneven economic growth.

But, what is not evidently clear in the chart is that it takes a decade and more for successive governments to bring fiscal situation back on track. The high fiscal deficit in 1990s was actually created in late 1980s, and it consumed three governments before, it was tamed. And that may be the biggest worry hanging over the market.

But why is the fiscal deficit such an important variable? This is because the government is the largest spender and borrower in the economy, and as such, its finances have a far-reaching influence on the economic activity. A high fiscal deficit forces the government to step up its borrowing programme.

And because, the government is always the best borrower, it reduces the credit availability for private sector, besides, raising the interest rates for everybody. This, in turn, dampens the capital investment by corporates and forces consumers to cut back on high-ticket purchases, such as homes and automobiles.

Besides, affecting private sector spending pattern, the high fiscal deficit has other unintended consequences also. It forces the government to prioritise non-plan expendituresalaries, subsidies and interest paymentsover planned expenditures that include spending on projects in infrastructure and social sector. This policy hurts the growth rates as the former expenditure is focussed on consumption spending, while the latter leads to the creation of new assets that aid future growth.

A high fiscal deficit also leads to corresponding rise in current account deficit with merchandise imports exceeding exports. This leads to depreciation of home currency that raises the cost of imports resulting in economy wide inflation as imported goods are a key input across sectors.

Depreciation also raises the cost of foreign capital and reduces the attractiveness of India as an investment destination. If you put it all together, what you get is the economic environment that is hostile to consumption and investment. This is not a great recipe for the Indian growth story. Now, you see why all eyes are on the coming general election.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Portfolio

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions