The Revenue Secretary is reported to have sent a missive to the Central Board of Direct Taxes asking the Board to explain why direct taxes collection had fallen short of the revised estimates. That the Revenue Secretary did not wait for the provisional accounts for the year is revealing. I think he gave vent to his frustration.
Why is direct taxes collection an important indicator of economic health?
The glaring weaknesses
The budget estimates placed direct taxes collection in 2015-16 at Rs 7,97,995 crore. The revised estimates were scaled down to Rs 7,52,021 crore. The actuals may be less. That means the government was unable to collect more than Rs 45,000 crore of the budgeted revenue and the shortfall could rise. That kind of shortfall is an indicator of several weaknesses in the economy:
Firstly, that the incomes of individuals have fallen and corporate profits have declined steeply;
Secondly, that individuals and households will put away less money as savings;
Thirdly, that firms/corporates will have less money to invest in the new financial year;
Fourthly, wage/salary increases in the organised as well as unorganised sectors will be modest;
Fifthly, new jobs will be scarce; and
Sixthly, demand for goods and services by consumers and investors will be muted.
The available data confirm the above weaknesses. Yet, the Prime Minister remains cheerful.
Only Mr Modi could have told the Bloomberg India Economic Forum that thanks to his government’s prudent policies, “the economy is doing well”. Let me examine the main claims made by the Prime Minister on March 28, 2016:
1. Claim: To underplay the positive impact of the 70 per cent decline in oil prices, he said, “Between 2008 and 2009 crude oil prices fell steeply from a peak of 147 dollars per barrel to less than 50 dollars. Yet in 2009-10, India’s fiscal deficit, current account deficit and inflation rate got substantially worse.”
Response: Comparison with 2009-10 is manifestly absurd. It was the year when the full impact of the global financial crisis (September 2008) was felt, and global growth had collapsed to 0.028 per cent. It was the mother of all headwinds. Economists named the crisis as the Great Recession. Compare that to the 3.1 per cent growth the world’s economy registered in 2015. Mr Modi’s attempt to downplay the oil bonanza is puerile. The government’s Economic Survey itself points out that the gain to India has been about 2 per cent of GDP.
2. claim: To explain the negative export growth for 15 successive months, Mr Modi said, “We have not been lucky with global trade or growth. Both are low, and have not helped us in terms of export stimulus.”
Response: To quote the government’s Economic Survey, “the severity of the (export) slowdown — in fact, a decline in export volume — went beyond adverse external developments”. So, even Mr Modi’s own team does not buy his excuse.
3. Claim: Mr Modi cited fiscal consolidation as the main example of “prudence, sound policy and effective management”.
Response: The government had, in 2015-16, unwisely stretched the fiscal consolidation timetable by one year. The oil price bonanza resulted in savings worth about 1 per cent of GDP, making fiscal consolidation in 2015-16 much easier. While the fiscal deficit target of 3.5 per cent is praiseworthy, the math is puzzling (see my column dated March 13, 2016).
Facts prove claims wrong
4. Claim: Mr. Modi cited indicators such as credit growth and foreign direct investment.
Response: The present credit growth of 11.5 per cent is well below the long-term average. Moreover, credit to industry grew at just 5.6 per cent and credit to medium scale industries actually shrunk by 7.15 per cent. In the third quarter of 2015-16, FDI was 2.04 percent of GDP, which is average: it was higher in Q4 of 2007-08 (2.53 per cent), Q1 of 2008-09 (2.79 per cent), and Q2 of 2009-10 (2.43 per cent).
5. Claim: Mr Modi claimed that the government’s schemes will double farmers’ income by 2022.
Response: This claim has been rubbished in many articles, including my column on March 6, 2016. It will not happen because farmers’ income will not grow at 12 per cent a year.
6. Claim: Mr Modi spoke glowingly about his goal of “Reform to Transform” and cited several examples.
Response: Direct transfer of MGNREGA wages, opening of bank accounts under financial inclusion plan, Food Security Act, etc, were initiatives of the UPA government. Auction of spectrum was first done under the UPA, auction of coal blocks was first done under the NDA. HELP and UDAY are actually HELP II and UDAY II, an attempt to improve upon old policies. The other initiatives are, for the present, mere announcements.
7. Claim: Mr Modi talked about the initiatives his government has taken to boost employment generation.
Response: According to Labour Bureau data, new jobs in eight labour-intensive industries fell to 1.55 lakh in the first nine months of 2015, less than half of the number of jobs created in the corresponding period in 2013 and 2014, and less than a quarter of the number in the corresponding period in 2011.
I do not doubt the intentions of the government. My worry is, does the government have a firm grasp of the current economic situation. The dazzle of ‘7.5 per cent GDP growth’ should not blind us to the reality of poor aggregate demand, sputtering investment, stalled exports and near-zero job creation. This is not the time to bask in an illusory sunshine.