Will a lower fiscal deficit be due to higher tax revenues or lower expenditure?
One reason why S&P has been reluctant to upgrade India’s credit rating has been the fiscal position. But isn’t goods and services tax (GST) supposed to raise the country’s tax-to-GDP ratio? S&P says it will, but it’s likely to be offset by other factors.
Here’s what it said, “Administrative efforts to expand the tax base--including demonetisation (which has increased the number of tax registrants) and the introduction of the GST in July--corroborate our belief that government revenues will accelerate into the forecast period…..Although we expect central government to broadly succeed in controlling deficits at the federal level, we foresee that problems at the state level will add 3% on average to the consolidated general government deficits over the forecast horizon.”
And here’s what Moody’s said about it: “Measures which increase the degree of formality in the economy, broaden the tax base (as with the GST) and promote expenditure efficiency through rationalization of government schemes and better-targeted delivery (as with the DBT system) will support the expected, though very gradual, improvement in India’s fiscal metrics over time.” But consider the accompanying chart, with data taken from the International Monetary Fund’s latest Fiscal Monitor, published in October 2017. The chart does show India’s fiscal deficit going steadily lower. But there’s a catch.
No, it’s not the obvious one that the IMF has no crystal ball that enables it to foresee things years ahead. What is far more interesting is that almost the entire lowering of the deficit is not due to a higher tax-to-GDP ratio, but due to a lower expenditure-to-GDP ratio.
In other words, the IMF seems to be relying on expenditure compression by the Indian government to achieve a lower fiscal deficit. It doesn’t seem to set much store by the introduction of GST, or perhaps it believes there are other offsetting factors.
As the quotes given above show, both S&P and Moody’s exhibit a degree of scepticism regarding any rapid improvement in India’s fiscal position.