3 reasons why growth may falter

The United Progressive Alliance government, in the recently announced Union Budget for 2004-05, indicated its thrust towards the rural economy and high investment for growth. Despite high allocations on these heads, the government aims to maintain fiscal discipline. Simply put, it has projected a revenue deficit of 3.1 per cent for 2004-05, lower than 3.7 per cent as was estimated by the previous NDA government.

UPA: Expecting a larger coffer!

(Rs cr.)	NDA	UPA	% higher
Tax Revenue	220,132	233,906	6.3%
Non-Tax Revenue	70,749	75,416	6.6%
Disinvestment	16,000	4,000	-75.0%
Gross Borrowings	139,764	164,763	17.9%
Total Receipts	450,522	524,232	16.4%

The main reason for the UPA government's lower revenue deficit estimate is its expectations of higher tax and non-tax revenues this year than was estimated by the previous government (see table above). However, these expectations have a big caveat.

When we break up the tax revenue as estimated by the UPA government, the top two contributors, i.e., excise duties and corporation tax, are likely to rake in growth of 18 per cent and 40 per cent over 2003-04. This, the government has assumed on account of high growth of the Indian economy (thus growth in trade and high excise income), and rising profitability of Indian corporations (thus growth in corporate tax income).

Where will the taxes come from?

(Rs cr.)	03-04	04-05	Change
Corporation Tax	62,986	88,436	40.4%
Customs	49,350	54,250	9.9%
Excise Duties	92,379	109,199	18.2%
Service Tax	8,300	14,150	70.5%
Total Tax Revenue*	187,539	233,906	24.7%

* Excludes states' share

Now, even when we consider the current momentum of growth of the Indian economy, such high growth expectations of 25 per cent Y-o-Y

from tax revenues seem lofty. This is considering the fact that in the last decade, the highest growth in tax revenues stands at 23 per cent that was achieved in the year 1999-00 and the average growth comes to a meager 13 per cent.

The pressure on the government finances is also magnified because of the fact that while average growth in non-tax revenues for the last decade has been 12 per cent, the growth expected by the government in 2004-05 is a negative 0.1 per cent. Thus, the entire onus of receipts is on the tax revenue front, which if something goes wrong, can leave the country's financial position in a state of flux.

Now, let's focus on what some of the things that can go wrong:

The 'what ifs'...

1. Uncertain monsoons: Indian industry's dependence on rural demand for profits makes the whole situation even more uncertain, considering the fact that monsoon, which largely determine the income for the rural population, have not shown signs of normalcy this year. If something goes wrong on this front, India Inc's profitability and consequently the government's corporation tax estimates can go awry.
   

2. Political concerns: Then there are political concerns emanating from the reservation shown by the government's Left partners on the FDI policy. If the government with its Left partners continues to get involved in solving their respective ideologies, rather than taking stock of the management and administration of the economy, it may slow its reflexes in responding to a given fiscal situation. Consequently, growth might suffer thus putting pressure on the fiscal.
   

3. Inflationary pressures: Inflation, which has crossed the 6 per cent level, is a big cause of worry for growth of the economy. Rising prices on account of rising input costs might put additional burden on India Inc.'s profitability, thus derailing the government's objective of meeting its tax targets.

These factors, and some more like global economic slowdown led by China and geopolitical tensions, are big caveats in the government's path of meeting its revenue projections. On the qualitative aspect of it, the allocated expenditure, if not directed properly towards whom they are meant for (read, the poor), will render the purpose of the entire budgetary exercise a farce. As always!