India Tax Insights – ninth edition

EconoMeter

  • Share

1 After demonetization, the RBI and a number of rating agencies have revised India’s FY17 GDP growth forecasts downward.

Chart 1: OECD Global Economic Outlook 2016 EY -  OECD Global Economic Outlook 2016 Source: OECD Global Economic Outlook 2016

  • Taking into account the contractionary impact of demonetization, particularly in the 3rd and 4th quarters of FY17, the RBI, in its December 7th Monetary Policy Review, reduced India’s FY17 GDP growth forecast from 7.6% to 7.1%.
  • A number of rating agencies have also revised their earlier forecast for India’s FY17 GDP growth downward by varying margins.
  • OECD projects global GDP at 2.9% in 2016 and 3.3% in 2017 based largely on strong fiscal support undertaken by most countries.

2 On the output side, except for agriculture, construction and public services, there was an across-the-board reduction in the growth rates in 2QFY17 as compared to 1QFY17

Table 1: GVA: annual and quarterly growth rates (%, y-o-y) EY - GVA: annual and quarterly growth rates (%, y-o-y) Source (Basic Data): MOSPI - GVA: gross value added

  • Agriculture, construction and public services showed marginal improvement.
  • The fall in the growth of manufacturing, electricity and services is particularly notable.
  • In November 2016, services Purchasing Managers’ Index (PMI) dropped significantly to 46.7 from 54.5 in October 2016. Manufacturing PMI also fell from 54.4 to 52.3.

3 Demand conditions signal weakness due to weak investment and near-stagnant export demand

Table 2: growth in components of aggregate demand with 2011–12 as base (% y-o-y) at constant prices EY - growth in components of aggregate demand with 2011–12 as base (% y-o-y) at constant prices Source: CSO, MOSPI, Government of India PFCE: Private final consumption expenditure; GCE: government final consumption expenditure; GFCF: gross fixed capital formation; EXP: exports; IMP: imports; GDPMP: GDP at market prices

  • Gross fixed capital formation, reflecting investment demand in the economy contracted from (-) 3.1% in 1QFY17 to (-) 5.6% in 2QFY17, registering its third consecutive quarterly decline.
  • Growth in export demand nearly stagnated at 0.3% in 2QFY17.
  • Discrepancies still accounted for a relatively significant portion of GDP in 2QFY17

4 RBI postpones rate revision in view of domestic and global uncertainty

Chart 2: inflation (y-o-y; %) EY - inflation (y-o-y; %) Source: MOSPI, Office of Economic Adviser

  • RBI, in its December Monetary Policy Meet, has left the repo rate unchanged at 6.25% in view of heightened uncertainty, both in global and domestic economic conditions, belying market expectations of a rate cut.
  • Contractionary forces have led to a fall in Consumer Price Index-based inflation, which at 3.6% was at a two-year low in November 2016.
  • Wholesale Price Index-based inflation fell further to 3.2% (y-o-y) in November 2016 from 3.4% in September 2016 because of a decline in prices of agricultural items, including food and non-food articles.

5 The Center’s fiscal deficit stood at 79.3% of the annual budgeted target during April—October FY17

Chart 3: cumulated fiscal deficit up to October 2016 as a percentage of annual budgeted estimates for FY17 EY - cumulated fiscal deficit up to October 2016 as a percentage of annual budgeted estimates for FY17 Source: Monthly Accounts, Controller General of Accounts, Government of India

  • The Center’s fiscal deficit stood at 79.3% of the annual budgeted target during April–October FY17.
  • Disinvestment proceeds stood at 59.5% of the annual budgeted target during April–October FY17 as compared to 31.2% in the corresponding period of FY16.

6 The Center’s revenue deficit stood at 92.6% of the annual budgeted target during April–October FY17

Chart 4: cumulated revenue deficit up to October 2016 as a percentage of annual budgeted estimates for FY17 EY - cumulated revenue deficit up to October 2016 as a percentage of annual budgeted estimates for FY17 Source: Monthly Accounts, Controller General of Accounts, Government of India

  • The Center’s revenue deficit increased to 92.6% of the annual budgeted target during April–October FY17 as compared to 72.9% during the same period in FY16.
  • Huge payouts under the 7th Pay Commission kept the revenue spending elevated.

7 Tax revenues grew by 18% during April–October FY17, but growth in non-tax revenues has remained subdued

Table 3: gross tax and non-tax revenues (annual and cumulated year till date, y-o-y) EY - gross tax and non-tax revenues (annual and cumulated year till date, y-o-y) Source: Monthly Accounts, Controller General of Accounts, Government of India
RE: revised estimates; BE: budget estimates;

  • Cumulated gross tax revenues grew by 18% during April–June FY17, compared to 23.1% during the same period of FY16.
  • Direct taxes grew by 10.7% and indirect taxes by 24.6% during this period.
  • Growth in non-tax revenues was low at 3.7% as compared to the corresponding value of 45.6% in FY16, largely due to a slowdown in dividends by PSUs

8 Except for corporation tax and customs duty, other major Central taxes have done well

Table 4: tax revenues (annual and year-to-date growth rates, y-o-y) EY - tax revenues (annual and year-to-date growth rates, y-o-y) Source: Monthly Accounts, Controller General of Accounts, Government of India

  • In terms of revenue growth during April–October FY17, three taxes did satisfactorily: Union excise duties (46.4%), income tax (19.3%) and services tax (24.5%).
  • In the same period, in terms of revenue growth, two taxes underperformed: corporation tax (4.5%) and customs duty (4.9%). This trend reflects weakness in investment and import demand.

9 The Center’s revenue expenditure has increased sharply because of revision of salaries and pensions

Chart 5: growth in cumulated revenue expenditure up to October 2016 EY - growth in cumulated revenue expenditure up to October 2016 Source: Monthly Accounts, Controller General of Accounts, Government of India

  • Total expenditures grew by 12.6% during April–October FY17 as compared to 6.2% in the corresponding period of FY16.
  • Revenue expenditure increased sharply to 16.8% during April–October FY17 from just 3.0% during this period in FY16 because of the implementation of the 7th Central Pay Commission’s recommendations.

10 The Center’s capital expenditure contracted sharply in the first half of FY17

Chart 6: growth in cumulated capital expenditure up to October 2016 EY - growth in cumulated capital expenditure up to October 2016 Source: Monthly Accounts, Controller General of Accounts, Government of India

  • The Center’s capital expenditure contracted sharply by (-) 12.8% during April–October FY17.
  • This was in contrast with the growth of 31% during the corresponding period of FY16.

Back to Top

Back