The government expects the goods and services tax (GST) and increased surveillance to boost tax revenues over the next two years, taking India’s tax-to-GDP ratio close to 12% by FY20.
The higher revenues are projected to push up capital spend of the government, bring down fiscal deficit to sustainable 3% of GDP and lower the revenue deficit to 1.4% of GDP by FY20. The medium-term expenditure framework released by the government on Thursday shows tax-to-GDP ratio rising 30 basis points each in FY19 and FY20 to 11.6% and 11.9% respectively.
The government expects any shocks to tax collections due to the introduction of GST to be absorbed in the current fiscal. It said “going forward in the years 2018-19 and 2019-20, the gains from expansion of the tax base due to the introduction of GST and the increased surveillance post demonetisation will ensure that tax-GDP ratio will increase by 30 basis points in each of the above FYs in question”.
Higher taxes will allow the government to spend more on creation of capital assets. The share of capital spending in total spending of Rs 26 lakh crore in FY20 is set to rise to 15%, compared with 14.4% in FY18 in a total spending of Rs 23.4 lakh crore.
Ahead of the next general elections, welfare spending is also set to get a boost from the surge in tax revenues with spending on centrally sponsored schemes set to rise 23.6% in FY20 to Rs 5.67 lakh crore from Rs 4.59 lakh crore in FY18. Education and healthcare are the gainers. Pradhan Mantri Awas Yojna will also get bigger support towards the housing for all initiative.
The declining interest rates have helped the government save on interest and the stable government finances are expected to keep interest rates low over the next two years. The government’s FY17 interest cost was Rs 12,000 crore lower than that budgeted, which the government said indicated the economy is moving towards a more benign interest rate cycle.
“If this trend continues, it will have an impact not only on the government expenditure but will also have a salutary impact on the investment decisions of economic agents in the country,” the statement said. MTEF Projections for nominal interest payments for 2018-19 and 2019-20 have been pegged at Rs 564,400 crore and Rs 615,000 crore. These show a steady increase in absolute terms but have been projected to fall if calculated as a percentage of gross tax revenue and revenue receipts.
Interest payments are projected to decline as a proportion of gross tax revenue and revenue receipts from budgeted 27.4% and 34.5% in FY18 to 25.7% and 33.2% in 2018-19 and 24.4% and 32.3% in 2019-20. This is partly due to the robust tax revenue growth. “Coupled with the targeted FD of 3.0% of GDP in 2018-19 and 2019-20, it may safely be assumed that there will not be any upward pressure on interest rates,” the statement said.