Budget 2017 should put to rest all claims related to a fiscal windfall accruing on account of the demonetisation exercise. There has been absolutely no gain in terms of corporate and income taxes in 2016-17, with the revised estimates provided in the budget documents being exactly similar to the budget estimates presented last year (when demonetisation was nowhere on the horizon).
Arun Jaitley’s budget speech made it clear that net tax revenues grew at 17% in 2016-17, exactly the same rate at which it grew in 2015-16. This is after two income disclosure schemes announced this financial year, one before and one after the note ban.
The increase of 0.5% of GDP in the revised estimates of gross tax collections in 2016-17 from last year’s budget estimates is entirely due to the increase of 0.5% in the excise duty collections. The Economic Survey presented on Tuesday has shown that domestic taxes over petrol have increased by 152% between June 2014 and November 2016 and that over diesel by a much higher proportion. This soft option of revenue mobilisation is no longer available, given the upward movement of international oil prices in recent times.
What is more significant is that the budget estimates for gross tax revenues in 2017-18 remain exactly the same as the revised estimates for 2016-17, at 11.3% of GDP. While income tax collections are projected to increase slightly by 0.3% of GDP in 2017-18, corporate tax collections are projected to decline by 0.1%. Indirect taxes are projected to fall by 0.2% of GDP in 2017-18. Thus, the government is not expecting any tax bonanza even in the next fiscal.
Non-tax revenues, including dividends and profits from the RBI, banks and financial institutions are also projected to fall in 2017-18.
Given this anti-climax vis-a-vis revenue mobilisation, and the fiscal conservatism displayed by the government in adhering to a stringent fiscal deficit target of 3.2% of GDP, total expenditure is projected to fall from 13.4% of GDP in 2016-17 to 12.7% of GDP in 2017-18. Even when the Economic Survey has pointed out a fall in real investment in 2016-17, both private and public, the budget has projected a 0.1% of GDP drop in capital expenditure in 2017-18. It is clear that the demonetisation has failed to expand the fiscal space of the government to stimulate the economy.
Jaitley mentioned in his budget speech that India’s tax-GDP ratio is quite low and also expressed concern over the skewed proportion of indirect to direct taxes, from the view point of social justice. He also went on to provide data to demonstrate how “we are largely a tax non-compliant society”.
Yet, Budget 2017 has failed to inform us how exactly the government intends to expand the tax net and mobilise additional revenues. This objective of demonetisation, therefore, has not been achieved.
This would not have been a major issue, had demonetisation been a benign exercise. However, the Economic Survey itself has projected a fall in nominal GDP growth in 2016-17 by up to 1 percentage point, due to demonetisation, implying a loss of around Rs. 1.35 lakh crore to the national economy. The costs of printing new currency and financing the bonds issued to sterilize the liquidity surge in the banking system post-demonetisation, which together would not be less than Rs. 20,000 crore, should be added to this loss.
The government has nothing substantive to show in terms of fiscal gain due to the note ban. It is time that it is held accountable for such economic irrationality.
(Prasenjit Bose is a Kolkata-based economist)