Praying for deliverance

Context: The fiscal outlook is the grimmest in at least three decades, and the challenges are probably without precedent

Reasons for the bad shape of the economy

• Slower growth of Non-debt revenue: Non-debt revenue in relation to Gross Domestic Product (GDP) will certainly shrink for a third successive year.

• Possible dip in nominal GDP: At best it will match last year’s Rs 204 trillion with inflation neutralizing the drop in real numbers. 

• Low rates of Goods and Services Tax (GST): The rates for goods and services tax (GST) average much lower than revenue-neutral rate.

Analyzing the options available to deal with the revenue shortfall

• Borrowing: Government has indicated a borrowing limit of Rs 12 trillion, compared to Rs 8 trillion provided in the Budget, which remains unsustainable.

• Reform Direct tax structure: by closing tax loopholes, raising the tax rates on capital gains and re-introducing wealth tax

• Issues with wealth tax/direct tax: It would encourage firms to finance growth by accumulating debt instead of issuing equity and to reduce the size of net assets.
• Increase Goods and Services Tax (GST): may result in slower recovery  and fuel inflation 
• The finance commission may recommend for a cut in tax share for states: which will have a bad impact on cooperative federalism

Conclusion: Thus, every option before the finance minister to deal with revenue shortfall comes with a price tag.