India Insight:Revenue collections up significantly in November

Fiscal deficit reached 86% of the government’s budget estimate (BE)during April-November 2016 (FYTD), versus 87% in April-November 2015.

The cumulative fiscal deficit has reached 3% of GDP FYTD (vs the BE of3.5% of GDP for FY17).

Gross tax revenue collection much ahead of target during April-November: The central government's gross tax collections grew 55% YoY inNovember and remained strong at 22% YoY FYTD (vs. BE of 12%YoY).

Taking into account assignment to states, net tax collection was up 34% YoYFYTD (well above BE of 12% YoY).

Direct tax collections grew 80% YoY in November and 14% YoYFYTD (similar to BE of 14% YoY). While a part of this strong growthcould be explained by favourable base effect, we believe thedemonetisation move by the government would have helped. Asper a media report, though the growth in advance tax collections fromlarge companies seems to have been largely muted in the Dec-16quarter, there seems to have been an increase in tax paid by small andmedium businesses. Looking at the breakdown, the corporate taxcollections grew by a whopping 164% YoY in November and 9% YoYduring April-November 2016 (vs BE of 9%). The growth in personalincome tax collections was up 41% YoY in November and +21% YoYFYTD (vs BE of 23% for the full year).

Indirect tax collections grew 27% YoY FYTD (vs the BE of +10%),led largely by higher excise duty and service tax collections even ascustoms duty collections lagged. This is partly on account of benefit offrequent hikes in excise duty on gasoline and diesel (announced latelast year) flowing in and revisions in the service tax rate.

Growth in government spending (YTD) above budget estimates:Government spending was up 13% YoY in November and +13% YoY duringApril-November 2016 (above the BE of +11.5% YoY for FY17). Looking at thebreakdown, revenue expenditure growth stood at +16% YoY FYTD (above BEof 12.5% for FY17). Capital expenditure, on the other hand, declined 10%YoY during April-November 2016 (much below the BE of +5%YoY). Allocationwas higher YTD towards defence, food subsidies, interest payments, ruraland urban development, roads and human resource development.

Government likely to achieve FY17 fiscal deficit target of 3.5% of GDP:While there could be some shortfall in achieving disinvestment and telecomreceipt targets, revenue from the income declaration scheme (incl PMGKY)and the likely curtailment in spending will help offset this, in our view.

Impact of demonetisation to be largely neutral on government financesin FY17: While it is difficult to ascertain the impact of recent demonetisationmeasures on fiscal situation in the short term until more data is available, weexpect it to be largely neutral. While some tax buoyancy is expected on highertax compliance and income declaration, this is likely to be offset by atemporary slowdown in economic activity expected in the Dec-16 and Mar-17quarters thus adversely impacting gross tax collections (both direct andindirect tax revenues).