India Insight:Tax revenue collections lag in December

The fiscal deficit reached 94% of the government’s budget estimate (BE)during April–December 2016 (FYTD): This compares with 88% registered inApril–December 2015. The cumulative fiscal deficit has reached 3.3% of GDPFYTD (vs the BE of 3.5% of GDP for FY17). We expect the government to beable to achieve the fiscal deficit target of 3.5% of GDP for FY17.

Impact of demonetisation to be largely neutral on government financesin FY17: While it is difficult to ascertain the impact of demonetisationmeasures on the fiscal situation in the short term until more data is available,we expect it to be largely neutral. While some tax buoyancy is expected onhigher tax 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 (as can be seen fromthis month’s performance, discussed later).

All eyes on FY18 union budget to be announced tomorrow (1 Feb-17):We expect the central government to target the fiscal deficit at 3.3% of GDPfor FY18 (vs 3.5% of GDP budgeted for FY17). Our key expectations from thebudget include: (a) rationalisation of direct taxes by raising basic taxexemption limits and widening the tax slabs for individuals and somereduction in the corporate tax rate while gradually removing exemptions, (b)increased spending in rural areas for infrastructure and other social sectorspending schemes, (c) measures to encourage affordable housing andboosting public capex, (d) incentives to promote digitalisation, (e) timing ofimplementation of GST (likely by Jul-17) and announcing of new medium-termfiscal targets. We estimate fiscal space of at least ~0.5% of GDP to beavailable in FY18, partly from higher tax buoyancy on account of thedemonetisation move and the rest from windfall gains that could be used torevive domestic demand.