Budget 2016: Should govt stick to fiscal deficit target in face of deflation?

Motilal Oswal believes this deflationary trend is likely to continue in FY17 as well, thus impacting tax revenues once again
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Feb 22, 2016, 09.22 AM | Source: Moneycontrol.com

Budget 2016: Should govt stick to fiscal deficit target in face of deflation?

Motilal Oswal believes this deflationary trend is likely to continue in FY17 as well, thus impacting tax revenues once again

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Budget 2016: Should govt stick to fiscal deficit target in face of deflation?

Motilal Oswal believes this deflationary trend is likely to continue in FY17 as well, thus impacting tax revenues once again

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Moneycontrol Bureau

In light of the current deflationary environment, led largely by commodities, and the resultant decrease in tax collection — both direct and indirect — it might be prudent if the government defers its fiscal consolidation roadmap to push growth, says broking firm Motilal Oswal Securities in its Budget 2016-17 Preview. "The better prospects of growth that this would bring is likely to be welcomed by financial markets," the report says.

It also says deflation has derailed the disinvestment programme, as most PSUs shortlisted were from the commodity and infrastructure sectors, affected by deflation.

Motilal Oswal believes this deflationary trend is likely to continue in FY17 as well, thus impacting tax revenues once again. "On the direct tax front, lower corporate profitability has impacted tax collections. Lower profitability has also put a lid on the growth in salaries and jobs, impacting personal income taxes."

"Indirect taxes have been hit by lower prices of commodities because of ad valorem nature of most of the indirect taxes," the report says.

However, year-to-date (YTD) tax collection this year has been higher in almost all categories, barring service tax. The brokerage firm attributes this to buoyancy in tax collection.

It says: "The buoyancy of tax collection has improved remarkably in FY16 due to additional tax efforts. These include (i) raising excise and service tax rates, (ii) imposing additional excise taxes in the oil sector, (iii) continued improvement in IT network for taxation, and (iv) special drive for compliance." Though, Motilal Oswal also points that this is unlikely to be repeated, particularly since tax revenue from the oil sector is now fairly static to oil price changes due to the specific nature of the taxes.

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Budget 2016: Should govt stick to fiscal deficit target in face of deflation?

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