ramu
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I think, I did not communicate my point clearly... What I said was 3% (if it is recommended) is more of an 'ideal state advisable figure'... It is practically not achievable.. is my concern... and thus my belief that we not not unncesessarily be worried about the number from 3.5% to 5.3%, specially in the next 5 years or so...
Time will tell. Watch this space in one year.
Indeed direct tax collection has been stupendous and it is expected to cintinue, but that is not what made the dent... We were on our way to a figure above 5%... But, the huge swing last year (to below 5% deficit) was predominantly an over-recovery (if you may) on account of 3G spectrum sales (by about $7-8Bn above the expected govt estimate in budget) and the decontrolled prices of Petrol also helped a big way in improving (by rolling out lesser subsidies, some of the related unwanted expenses were avoided) both the fiscal and current account deficits... But that can not be assumed to be the 'trend' as windfall profits like '3G' licensing happen only once in 5 years... and here is my humble submission why I believe in what I said...
You forgot the disinvestment policy of the government. India has far too much capital locked in share holding of the GoI. It should just focus on Infra bonds and other instruments instead of owning 90+ % of PSUs.
To pump out a >8% growth rate, you got to invest in lots of sectors and infrastructure and for that you have to take loans or invite private Capital and in such cases an 8% growth will not lead to a similar jump in tax revenues... Because (a) Infrastructure businesses (even with FDI) take more than 3-4 years to turn positive (let alone paying taxes) - e.g. Delhi Airport will take around 7-10 years to make its first profit (b) The depreciation is higher in the first few years (in cases of new investments into sectors, where govt wants focus) and to add to it, sector specific tax holidays also help postpone the tax earning potential... So, investment is far far greater than return (and thus taxes) in the first 3-4 years... On top of it, the reducing value of dollar makes export less attractive and reduce the inflow of solid direct income (as against FII money, which can vanish over night)
The returns of infrastructure projects are long term and I agree to it. But as long as the Finance minister finds innovative means of taxation, the swell in the coffers is just going to go on and on. The foreign reserves is increasing and so is the investment of GoI in gold.
Another important factor is that the controlled prices of Diesel and LPG are creating a bigger dent (a factor that did not exist for most of the last year due to lower crude prices, which have started increasing again)... Higher commodity (and agri) prices and increasing wages will also hurt EBITDA margins and that will add further pressures... In addition, the massive defence purchases will also have cost escalations that have not been budgeted and that will add to the outflow (as against no new inflows).... And, mind you, all this while the size of GDP is increasing like crazy and there will be no major returns in absolute short term and that 'WILL' push the deficit numbers higher...
Petrol is now deregulated, and diesel will follow suit if not today but in some time. Even if that does not happen, the prices of petrol and diesel are high enough and the GoI will not incur losses on account of subsidising the same.
One very important factor not many have considered is the GoI's policy to deposit money in the bank accounts of the poor instead of providing subsidy. This will in one stroke remove all the middle men (most of them) and the resultant money in the hands of people couple with NREGA will give money to the bottom of the pyramid. This one single factor will rejuvenate the economy by a minimum of a percentage point. Also the black economy that is not accounted for in India is estimated to come up to 500 Billion dollars (conservative estimate). This economy is the buffer to the real economy and this in a way will dampen any sharp growth or fall in real terms by contributing or hiding the figures from the remit of taxation.
What I am trying to imply is that, India is in an 'investment phase' and if you open the corporate histories around the world, you wil see that the 'leverage' or 'loans vs revenue ratios' or what you refer to as 'deficits', always jump up in these phases and are not necessarily bad... The only concern is that lending should not be made to stupid businesses or baseless business plans (like the credit growth phase in US or what we saw sometime back in China real estate market) and if you see the last 2 years, Indian banks have done all they can to ensure that only reliable parties get loans and that is our biggest strength... Our government's growth centric and yet smartly conservative mindset... This is not a political stand I am taking, but only some basic economic realities for a growth economy...
I am not against what you said... I am just saying that some of that is practically not achievable and yet, there is no major reason to loose sleep over it...
As I said, watch this space in a year's time.