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Home / Opinion / Cheap oil is still supporting the fisc, but impact is fading elsewhere

Tax revenues collected in April-June yet again demonstrate how India gains from global economic troubles. The buoyant indirect tax revenues, which grew by 30.8%, against a 36.3% increase in the same period last year, primarily reflect higher tax rates on petroleum as the entire oil price decreases have not been passed to the consumer. According to government data, subtracting the effect of these higher rates, revenues show a more modest growth of 10.2%.

The gap between revenue growth—with and without higher petroleum duties—is a good measure of fiscal support from low oil prices. Cheaper oil fetched robust tax revenues throughout 2015, besides enlarging producers’ margins and real incomes of consumers. It thus supported growth overall. Oil prices seems on course to extending the benefit this year as well—at least in propping up public finances and, therefore, the government’s capacity to sustain capital spending. Minus cheap oil, surely the quantum of public expenditure to revive private business investments and gross domestic product (GDP) growth thereon would be a lot less.

Despite the revenue health, the adjusted growth in indirect tax collections is below the 14.5% increase observed in April-June 2015. It is probably too early to tell from this whether growth in economic activity is comparatively slower this year. However, initial indications from the first quarter’s services and corporate tax revenues combined with readings from other indicators do not suggest a strengthening of economic activity either. For example, growth in service tax revenues adjusted for new/higher tax rates came in at a mere 4.3%. This matches the waning momentum reflected in the services’ Purchasing Managers’ Index (PMI) in June 2016—a seven-month low and the third consecutive monthly decline.

Growth in corporate tax revenues (net of refunds) is a sobering 4.43% in the first quarter. In this context, the manufacturing PMIs for April-June 2016 have shown profit margins getting squeezed against that in the corresponding period last year. Input costs have begun to rise while the firms are unable to pass on these price increases (output prices haven’t risen by matching magnitudes as the slack in capacities ranges around 25-30%). The manufacturing PMI average for April-June is lower than the preceding quarter’s (January-March), suggesting a slower pace of expansion.

Some elements of these data point to fading effects of low oil-price boost that held up growth all of last year. This seems especially true for the producer segment where the stimulus is visibly tapering off even as it still lifts government revenues substantially. More data points would be required to pin down trends for the consumer segment in this regard. From the standpoint of GDP growth, this uneven distribution or rather, the withdrawing terms of trade boost is of significance.

Renu Kohli is a New Delhi-based economist.

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