Economic Highlights

New Delhi, 16 July 2010

Factory Productivity Falls

GOVT ROPE TRICK ON TAX COLLECTION RISE

By Shivaji Sarkar

It is a paradox. Industrial production growth touched a seven-month low at 11.5% in May but direct and indirect tax collection are zooming. Clearly, a feat of sorts.

The Government is seemingly doing a rope trick that is difficult to understand. To bolster the official claims, it is also trying to revise upwards the growth projections. It should be good news but how this is being achieved is not known.

The Finance Ministry has an infinite appetite and greed for more. Reason enough   to probe the paradox. A fall in the industrial index (IIP) should cause worry and anxiety to the Government. As it is an indicator of an impending difficult if not disastrous situation.

The Central Board of Direct Taxes (CBDT) is apparently not keeping the country posted with the realistic situation. Like last year, this time too they are trying to project the picture of a shining India on the basis of advance tax collections in the first quarter. It states indirect tax collection zoomed by 43% to Rs 56,930 crore and direct tax collections by 16.88% to Rs 10,198 crore.

This is an astounding figure considering the country is reeling under a severe inflation with food and other essential commodity prices skyrocketing. It has brought down the purchasing power, increased raw material costs, depressed demand in the market and there is little to cheer on the job front.

In this scenario the claims look suspect though the figures per se are not incorrect. A year ago, the tax department had made similar claims and painted a rosy picture for the economy as it is doing now. At the end, when they could not achieve what was projected they chose not to publicize it.

Significantly, the Government had been missing the target for the last two years. The direct tax collection at the end of the fiscal 2009-10 fell short of the target by almost Rs 60,000 crore. It had collected Rs 330,000 crore till early March against a target of Rs 387,000 crore. The previous year also, the Government missed its target of Rs 3,45,000 crore due to the economic slowdown, which is not yet over.

In both years, the early projections were not different. That should not foreclose the results of the coming year. However, indications point to the re-enactment of the same scenario despite a very favourable growth projection by International Monetary Fund (IMF). This is not surprising. As international agencies do not do primary research and depend on the respective Governments for primary data. The data often is presented by the home Governments in a propagandist fashion.

Besides, the IMF prediction came before the latest IIP figures were published. The May figures fell sharply from that of April which was at 16.5%. While the figures indicated deceleration all over, the worst was noticed in the manufacturing sector. It slowed down by over 7% from 19.4% to 12.3%.

The fall in consumer durables is remarkable ----- an indicator of the purchasing capacity. It fell from 37% last year, when recession was said to be returning to a growth path. According to FICCI a low growth of 1.7% witnessed by the textile sector was “worrisome” since textiles are the biggest job spinner after agriculture.

Another aspect that adds to the anxiety is that sectors which are under the public sector are not showing a robust growth. If this persists, it would translate into higher budgetary support for these areas thus causing a further drain on Government’s finances. This might signify further cutting down on developmental projects. A small indication of this is apparent in the dilution of the Right to Education Act which proposes to curtail the number of beneficiaries.

Regardless of a revenue department official’s assertion that the Government was expecting a good show on the advance tax collections in the last quarter, the Finance Minister admitted that whatever recovery is there is not broad-based.

Arguably, how did the Government mop up more advance tax? The mystery is solved by oil PSUs. Oil marketing companies which did not pay tax last year in the absence of receipt of payment from the Government, paid advance tax this time. In addition to oil companies, banks and pharmaceutical companies paid substantially higher tax, year-on-year. All others paid at a moderate level.

This exposes the propagandist myth of higher collections. Another myth is that the taxes are being collected because of the CBDT. In reality, it is despite them. The CBDT and its affiliates ---- income-tax and other tax departments--- are themselves a heavy burden on the exchequer. It is time to prune their sizes. They almost gobble up half of what they supposedly collect. A poor and feeble nation does not need such tax gobblers.

The CBDT officials may be upbeat but the industry is not. The generalized inflation at 10.55% at June end has almost rattled the Associated Chamber of Commerce (Assochaam). In a survey conducted among its members, 70% of the companies said that if the prices continue to rise as they are then the input costs would increase manifold. About 76% companies expressed fears about the increase in energy costs and workforce wages.

The industry also expressed apprehension at the way the Reserve Bank jacks up interest rates. The Assocham feared that this would not only increase capital costs but would also reduce domestic demand. A slump in demand might severely tell on corporate finances and lead to further loss of jobs. The country is virtually in a vortex and does not need to regale itself in an optimistic projection, based on the surreal.

It needs to read more in the industry’s apprehensions. If this anxiety comes true, which almost seems likely, if the trends of the last two years are taken into reckoning, the shape of the economy at the end of the current fiscal would be anything but rosy. The Government once again is bound to miss its revenue target! ---- INFA

(Copyright, India News and Feature Alliance)