The Fourth quarter results of GDP data showed a phenomenal 7.7 percent growth rate and has established India firmly as the fastest growing global economy. This trend, according to experts, is likely to continue for the next few years. With structural reforms like demonetisation, the implementation of the Goods and Services Tax and the enforcement of the Insolvency and Bankruptcy Code, we had two challenging quarters. Those who predicted a two percent decline in GDP growth have been conclusively proved wrong. A distinguished predecessor of mine feared that he may have to live his future in poverty. We have enabled every Indian to be a part of the world’s fastest growing economy. The future looks much brighter than the past. This trend is likely to continue for some years.
The Impact of Structural Reforms
All the structural reforms undertaken in the last four years have been detailed in my blog dated 26.5.2018 titled “My Reflections on the NDA Government after Completion of Four Years in Power”. Similarly, the social sector schemes and the rural development programmes of the present Government have been unprecedented. These involve legislations which are path breaking and development works in roads, railways, housing, power, sanitation - which yield high social benefits require high level of government expenditure. This type of high government spending promotes growth. This is what we are witnessing today.
Where are the Jobs?
An analysis of the data released clearly shows that the construction sector is expanding by double digits. It is a job creating sector. Investment is increasing. Domestic investment is also increasing. The FDI is at an unprecedented level. The IBC is unlocking the value in the Non-Performing Assets. Fixed capital formation is growing. Manufacturing is expanding. We are spending huge amounts on infrastructure creation. Expenditure on rural projects has increased in a big way. The social sector schemes, more particularly the financial inclusion programmes, have created a wave of self-employment. Each one of these is a high job creating sector.
The Revenue Situation
If this trend continues over the next few years we are looking for a better future. The principal source of income of the Central and the State Governments is tax collection. If India remains a tax non-compliant nation, both Center and State Government will have very little to spend. They will borrow more and spend less. Demonetisation, GST, digitisation, AADHAR and the anti-black money measures are leading to gradual formalisation of the Indian economy. Measures like Foreign Black Money Act, Benami Prohibition Act, Income Disclosure Scheme, changing the tax treaties with Singapore and Mauritius have all yielded rich dividends. Net direct tax collection has seen an unprecedented rise in the last few years. We have now reached 6.86 crore income tax return filers last year. The number of income tax returns post demonetisation show a 25 percent growth. Even the corporate returns have increased by 17 percent. The GST after a few weeks of its implementation became problem free and is leading to higher tax collection. With higher revenues, the Government has been able to spend more on infrastructure, rural India and social sector schemes and yet maintained fiscal prudence and keeping the fiscal deficit on downward glide path.
The Central Government collects taxes in the form of income tax, its own share of GST and the customs duty. 42 percent of the Central Government taxes are shared with the States. State Governments collect their 50 percent from GST besides their local taxes. These are independent of taxes on petroleum products. The States charge ad valorem taxes on oil. If oil prices go up, States earn more.
The last four years have seen an improvement in Central Government’s tax-GDP ratio from 10 percent to 11.5 percent. There is an increase of 1.46 percentage points. Almost half of this, 0.72 percent of GDP, accounts for an increase in non-oil tax-GDP ratio. The level of non-oil taxes to GDP at 9.8 percent in 2017-18 is the highest since 2007-08 a year in which our revenue position was boosted by buoyant international environment.
Despite higher compliances in new system, as far as the non-oil taxes are concerned, we are still far from being a tax complaint society. Salaried employees is one category of tax compliant assessees. Most other sections still have to improve their track record. The effort for next few years has to be to replicate the last four years and improve India’s tax to GDP ratio by another 1.5 percent. The increase must come from the non-oil segment since there is scope for improvement.
These additions have to come by more and more people performing their patriotic duty of paying the non-oil taxes to the State. The tragedy of the honest tax payer is that he not only pays his own share of taxes but also has to compensate for the evader. My earnest appeal, therefore, to political leaders and opinion makers is that the full and complete suggestion would be that evasion in the non-oil tax category must be stopped and, if people pay their taxes honestly the high dependence on oil products for taxation eventually comes down. In the medium and long run upsetting the fiscal maths can prove counter-productive.
Being Macro-economically Responsible
This government has established a very strong reputation for fiscal prudence and macro-economically responsible behaviour. We know what happened during the Taper Tantrum of 2013. Fiscal indiscipline can lead to borrowing more and obviously increase the cost of debt. The Government will be spending more on repayment of loans than on developmental works. The currency can become weaker thus importing inflation into the country. If inflows reverse that could add to the adverse perception. The government would be spending less on infrastructure, rural India and social sector, thus making development suffer. Reliefs to consumers can only be given by a fiscally responsible and a financially sound Central Government, and the States which are earning extra due to abnormal increase in oil prices.
Another distinguished predecessor of mine had stated that the tax on oil should be cut by 25 rupees per litre. He never endeavoured to do so himself. This is a “Trap” suggestion. It is intended to push India into an unmanageable debt – something which the UPA Government left as its legacy. We must remember that the economy and the markets reward structural reforms, fiscal prudence, and macro-economic stability. They punish fiscal indiscipline and irresponsibility. The transformation from UPA’s “policy paralysis” to the NDA’s “fastest growing economy” conclusively demonstrates this.
This article was written by finance minister Arun Jaitley and has been reproduced without any changes.