Through the Looking Glass

Financial Express As States issue more debt, finding the investors who will subscribe to the issue will require expanding the current pool of investors and making the investment more lucrative While there have been many deliberations in these pages on the growing amount of debt that the various tiers of the government (Centre and States) will have to raise, little discussion has gone into who they will raise the funds from. It is left to the all-encompassing term: ‘market borrowing’. We deep-dive to see who constitutes this market and what policy implications arise.  Every September, the Reserve Bank of India (RBI) releases a treasure trove of data: Handbook of Statistics on the Indian Economy. While there are many aspects of interest in this data release, we will specifically focus on tables 113 and 114. The former details the “Combined Liabilities of Central and State Governments” and the latter, “Ownership of Central and State Government Securities”. These annual data releases o...

Financial Express Shape of economic recovery will determine employment, debt and exchange rates The immediate fiscal deficit dynamics and growth outcomes for India post Covid-19 lockdown have been the subject of intense analysis and discussion. The human crisis of lives and livelihood did demand both an immediate and urgent response. With the lockdown now opening and economic activity picking up, it is important to look beyond FY21 to see how India could fare in the first half of the next decade. Discussions have focussed on whether the economic recovery will be L, U, V, W, or a swoosh, a la the logo of a famous sports brand. These descriptors refer to the shape of the chart when plotting real GDP (on y-axis) over time (on x-axis). The GDP in FY20 is estimated to be Rs 204 trillion (Rs 204 lakh crore) and if it had continued to grow at 8% in real terms, GDP would have reached Rs 300 trillion by FY25. Depending on the inflation trajectory, the nominal number would have been highe...

Budget 2020 cares for people’s economic aspirations, says Axis Bank’s Akhilesh Tilotia Financial Express India’s response to its dilemma will determine whether budgets of the next decade will have larger incomes to tax or larger taxes on incomes. This Budget Speech of the finance minister was one of the longest in recent history. Her previous Budget speech in July last year was around 11,000 words. This one was more than 13,000. Part A of the speech went from 8,000 words to 9,000. Part B went from 3,000 to 4,000. This depicts the relative importance attributed to the plans and schemes of the government and changing tax structures. The FM’s pictorial depiction of the bouquet of government schemes held by two caring hands of governance and financial sector reinforces the work required in building and unclogging the plumbing of the BFSI sector. There are many proposals that build on the agenda of liberalisation and privatisation such as the proposed Initial Public Offering (IP...

As the Centre and States try to find GST compensation cess monies, it is time to look beyond the present, to see how the future could unfold for State finances Financial Express The financial relationship between states and the Centre has been in news recently. The Fifteenth Finance Commission submitted its report to the president; there have been some delays in payment of the GST compensation cess, and there were some discussions on whether the Centre will honour its commitment of assuring a 14% revenue growth in the agreed-upon transition period. Constitutionally, Centre-State fiscal relations come up for review quinquennially (once every five years). States have ceded significant taxing powers to the Centre via GST. Earlier, the states had their own tax bases and could manage revenues by juggling taxation policies. This led to a large number of state-specific tax rates, a lack of uniformity in the tax structure in the country, and sometimes, a race to very low-tax regimes to...

The evolution of India’s tax-to-GDP ratio will require significant political and social consensus—a strategic modelling and planning of tax POLICIES is required Financial Express India’s tax-to-GDP ratio at the government level has hovered around 18-19% of GDP over the last few years (between FY17 and FY20E). Coupled with disinvestments, dividends, and other receipts, the central government mops up another 5-6% of GDP, taking the total revenues of the government to about a quarter of GDP. The government is committed to spend, on account of both revenue and capital expenditure, 29-30% of the country’s GDP, leaving it with a fiscal deficit in the 4-6% range. The revenue percentages for the government have remained reasonably sticky, and the expenditure items are also committed. As India works its way towards a $5 trillion economy, or double its current size, in the next few years, it is worth considering what the fiscal landscape could look like. As Esteban Ortiz-Ospina and Max R...

The knife-edge balanced nature of Government finances means that there is little leeway available for the Central and State Governments whenever there is a shortfall in receipts or an increase in expenditure. In both cases, they automatically reflect in a substantial change in the fiscal deficit. As India moves towards a US$5 trillion GDP economy, the current slowdown and the longer-term runway offers two ways to recast the current fiscal architecture. For the time being, we can park the debate on whether it makes more sense for the governments to run a counter-cyclical fiscal policy (i.e. pump in more money in the economy in times of slowdown even if it busts the fiscal deficit commitments) or keep true to its commitment on fiscal deficit numbers (irrespective of any slowdown in collections or in the economy). We take it is as a given that commitment to the fiscal deficit number matters more, especially since this is a number tracked closely by investors, credit rating agencies and...

Since the implementation of Goods and Services Tax (GST) in India, the Central Government is now a primary decision-maker on almost all the taxes in the country. With an effective veto power in the GST Council and its ability to set the income and corporate taxes and various custom duties, the Central Government now has a say on the rates at which taxes are levied across almost all commodities. Of the total revenues collected by the States and the Centre, around four-fifths of it is decided for by the Central Government. The taxes collected by the Central Government are then shared with the States in the ratios laid down by the Finance Commission (FC). What this the practical application of the above mean? In FY2020, the total receipts collected by the Central Government is budgeted to be Rs 26 lakh crore (or Rs 26 trillion). If the budgeted number holds, Rs 8 trillion will be shared with them as part of the FC formula. This leaves the central government with receipts of Rs 18 trill...