Expert Zone

Straight from the Specialists

Higher tax revenue from higher growth

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The 2013-14 budget got completely out of hand because of a whopping shortfall in tax revenue. Development outlays had to be drastically cut to manage the fiscal deficit.

The key to the budget is revenue. The ratio of gross tax revenue to GDP reached a high of 11.9 percent when GDP growth was at its peak of more than 9 percent in 2007-08. Since then, both declined and the ratio has been in the narrow range of 10-10.7 percent. GDP growth is a painless way of raising revenue.

Not all sectors, however, contribute to tax revenue to the same extent as they do to GDP. Agriculture, for instance, generates 18 percent of India’s GDP but is out of the tax net. More than 60 percent of tax revenue is derived from industry in the form of corporation tax, excise and customs although it generates less than 20 percent of GDP. Industrial growth is an effective vehicle for tax revenue.

The 2013-14 budget was unbalanced because there was no real industrial growth, but only an increase in prices. As a result, tax revenue was 6.3 percent short of the target. The fall was mainly in respect of corporation tax, which is about a third of the gross tax revenue.

Higher growth can help lower deficit

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

India’s bloating budget deficit has been a matter of concern. It means more borrowing by the government which results in overcrowding of the debt market and consequently, a higher rate of interest for the private sector. It also raises the rate on borrowings from abroad due to the downgrading by rating agencies which is bound to follow.

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