India will overshoot its 1996/97 fiscal deficit target of five per cent of gross domestic product, and the government needs new revenue streams in next years budget to stem the red ink, economists said yesterday.
Broadening the tax base is high on the agenda for finance minister P Chidambaram, who on February 28 will present the budget for the fiscal 1997/98 starting on April 1.
Chidambaram wants to lower the fiscal deficit to four per cent of GDP within the next three years.
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But working in a 13-party coalition, ranging from moderates through regional parties to communists, limits the finance ministers options for raising extra cash.
I do not think it is possible to contain the fiscal deficit, said Sunil Bhandare, adviser to the Tata group of companies, one of Indias biggest business groups.
The political compulsions of a coalition government will prevent the government from taking any hard decisions.
Getting a grip on the fiscal deficit defined as the budget deficit plus government borrowings is considered crucial to determining interest rates and containing inflation. Budgeted government borrowings for 1996/97 are Rs 35294 crore ($9.83 billion).
Excessive government borrowing to cover the outgoings would push interest rates higher and squeeze industrys efforts to raise capital, but printing money to pay the bills would feed straight into an inflationary spiral.
Interest rates currently range between 16.5 per cent and 20 per cent for financial institutions, and between 14.5 per cent and 18.5 per cent for banks. Money supply, measured by the M3 indicator, grew by 15.7 per cent year-on-year in mid-January 1997 to Rs 6,6553.20 crore, compared with 15.05 per cent growth last January.
Chidambaram will have to look at ways of increasing revenue collections, said Madan Sabn-avis, economist at term lender Industrial Credit and Investment Corporation of India.
This is going to be the problem, he said. In the last four to five years, we have seen the theory that lower tax rates lead to higher revenues has not held good for us.
Of total receipts of Rs 1,80,892 crore in 1995/96, tax receipts amounted to Rs 8108.80 crore. Tax receipts are budgeted in 1996/97 at Rs 97,310 crore out of total receipts worth Rs 2,03,900 crore.
Sabnavis said the government might have to look at new kinds of taxes. About 30 per cent of our GDP is beyond the tax net, Sabnavis said, referring to agricultural income. Trying to bring farmers into the tax net has been talked about for years, but is politically risky, he said.
Aashish Pitale, head of debt research at ICICI Securities and Finance Company (I-Sec), the Indian affiliate of investment bank JP Morgan, agreed that new revenue sources are needed.
Last time they came out with the MAT (minimum alternate tax), he said.
The controversial MAT was introduced last year to bring zero-tax paying companies into the tax net, and Chidambaram is under pressure to offer some concessions on MAT.
Before MAT was introduced, companies could avoid paying taxes by ploughing profits back into fresh capital investments.
I think they could come out with something similarly innovative this year also, Pitale said, adding that a tax on expenditure could be the coming budgets surprise.
Chidambaram may miss the 1996/97 target of five per cent of GDP, but at least he is going in the right direction. In 1995/96 the fiscal deficit was 5.9 per cent of GDP, or Rs 64,010 crore ($17.83 billion).
It is likely to be around 5.5 per cent, Pitale said.
The Centre for Monitoring Indian Economy (CMIE), an independent Mumbai-based research firm said it expected the 1996/97 fiscal deficit to be Rs 68,266 crore, or 5.4 per cent of GDP, against the budgeted figure of Rs 62,266 crore.
Shortfalls in planned sales of stakes in state-owned firms and in non-tax receipts are root causes for the missed target.
The 1996/97 budget called for divestment of stakes in state-owned firms to raise Rs 5,000 crore.
But the government put off its divestment programme due to the depressed state of the capital markets.
CMIE also said there would be a shortfall of around Rs 1,500 crore in non-tax revenue due to non-receipt of licence fees for basic and cellular telecommunications projects.
On the expenditure side there is a Rs 1,500 crore overshoot, mainly due to defence spending and subsidies.