India: Growth revival in sight but fiscal consolidation under cloud

  • The pre-Budget Economic Survey predicts that India’s GDP growth will accelerate from 6.75% in 2018 to 7-7.5% in 2019. India will recover from the double whammy of demonetisation and goods and services tax (GST) glitches, enjoy an export surge arising from the global economic boom, and reap the fruits of reforms to resolve the twin balance sheet (TBS) problem of overleveraged banks and companies.
  • The Survey warns that “a pause in general government fiscal consolidation relative to 2016-17 cannot be ruled out”.
  • This does not necessarily mean the Budget two days hence will show a reversal of fiscal consolidation: the finance minister has often been tougher fiscally than the chief economic adviser (who writes the Economic Survey). But GST collections will be received for only 11 months and not 12 in 2018, hitting Budget projections.
  • The good news: the number of indirect tax payers has shot up by a whopping 50% after GST. This portends well for tax compliance and revenue growth. New income tax filers are up 10.1 million since demonetisation, against an annual average rise of 6.2 million in the previous two years. Adjusting for earlier trends, the Survey calculates that demonetisation-cum-GST has produced 1.8 million additional income tax payers.
  • New tax payers report incomes barely above the taxable threshold, so revenue has not soared. But both tax compliance and revenue potential for the future have shot up. This may finally ensure long-term fiscal consolidation.
  • Direct tax collections have risen 18% in 2018, almost double the nominal GDP growth rate of 9.5%. This favourable trend suggests improved compliance after tax reforms and the attack on black money. This could finally lift India’s tax-to-GDP rate to significantly high levels after stagnation for three decades.
  • The main threats to the growth boom projected by the Survey include rising oil prices — an increase of USD10 per barrel could hit growth by 0.2-0.3%. The International Monetary Fund predicts a further rise of 12% in oil prices in FY19.
  • The Survey says India decoupled from the global economy in 2017-18, decelerating even while the rest of the world accelerated. This was mainly because of the shocks of demonetisation and glitches arising from the introduction of GST. Global experience suggests it will take 12-18 months for GST to stabilise, so the full fruits will be reaped in 2019.

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