Whenever we talk of budgetary challenges, attention invariably turns to the expenditure side where we pontificate on whether the government should spend more on subsidies or project expenditure. This is so because, unlike individuals who have an income to spend, the government has a list of expenses, and has the prerogative to then see how this money can be raised. When all things fail, it can always borrow, which individuals cannot do. Should this thinking actually change?
Once we get into the FRBM framework, there is always pressure to perform and governments then walk the razor’s edge of balancing revenue with expenditure. Revenue generation is actually an extraneous concept because while the rates are fixed by the government, the assumptions made are on certain growth targets being realised. When they do not materialise, then problems start.
The main source of revenue is taxation. The ability to increase revenue depends on the taxable base increasing steadily, for if it does not, then the entire edifice stars cracking. Income tax, for example, showed an elasticity of 1.3 to growth in GDP in the last five years, meaning thereby that if our GDP in nominal terms grows by, say, 15% (sum of, say, 8.5% real GDP and 6.5% inflation), then income tax receipts could grow by 19.5%. Similarly, the elasticity of corporate tax collections is around 0.80 for the last 5 years while that of customs is 1.36 with respect to change in imports. Curiously, in FY09, when imports soared due to high imports of crude oil when prices had touched the $150 mark, the government reduced the tariffs sharply, which led to a fall in customs collections. Excise has not shown any clear trend, though low growth in industry has necessarily meant low collections. Quite clearly, the revenue collections for the government are, in a way, beyond its purview and the assumptions made could go awry.
Last year, the government based the budget on 9% GDP growth, which though in retrospect looked ambitious, seemed okay then as the economy had grown by 8.5% in FY11. Now that this has been scaled down to 7%, inflation has helped to maintain the growth in base. But the problem is that IIP growth has been lacklustre while corporate profits have shown signs of declining in the third quarter. Clearly, revenue has come under strain because the growth scenario has not materialised.
The point here is that the government should