WITH the replacement of the Planning Commission by the Niti Aayog, the Fifteen Year Vision, Seven Year Strategy and Three Year Action Agenda process is to come in place of the original Five Year Planning one. While the first two are still being developed, the NITI Aayog released some time back the final version of Three Year Action Agenda (TYAA) for the period 2017-18 to 2019-20, the remaining part of the Fourteenth Finance Commission period. The document claims that it “charts an ambitious, transformational yet achievable Action Agenda for the government during 2017-18 to 2019-20”. It further states that the “Action Agenda proposes a path to achieve all-round development of India and its people”. Unabashedly rooted as it is in the neo-liberal framework that has guided policy-making over the last two and a half decades and spawned god knows how many generations of ‘reforms’, the TYAA actually offers little hope for an early amelioration of the employment and income crisis afflicting the majority of the Indian populace which has in turn generated strong sluggish tendencies in the Indian economy.
Symptomatic of its underlying outlook, and the character of the regime that has created its authoring body, are the projections for revenue and expenditure of the central government made by the TYAA. While the NITI Aayog thinks of it as something that would yield a significant growth of revenue, no dramatic rise in the tax-GDP ratio is actually envisaged to happen over the next three years. The Gross Central Taxes to GDP ratio, it is estimated, will go up from around 11.3 per cent in 2016-17 to about 12.2 per cent by 2019-20, while the centre’s net share over the same period is expected to increase from 7.2 to 7.9 per cent of GDP. To put these projections in perspective – if they are actually realised they would at best mean that the central tax-GDP ratio would reach by the end of the decade the level that it had way back in 2007-08. Even this limited improvement in tax hinges on the extremely optimistic outlook that the Niti Aayog has about the effects of demonetisation (and the so-called war on black money) and the introduction of GST.
According to the forecast in the TYAA, the central direct tax to GDP ratio is expected to go up from 5.6 per cent in 2016-17 to 5.8 per cent in the current financial year, 6.0 per cent in the next and finally 6.3 per cent in 2019-20. This is despite the fact that this ratio has now for several years shown no trend of increase – the corporate tax component in fact has been persistently declining as a share of GDP. While the potential gains from demonetisation in the form of reduction in tax evasion are still being harped on, we now have two pieces of evidence that tell a clearly different story. One is that the RBI has confirmed that 99 per cent of the outlawed 500 and 1000 rupee notes have been returned, meaning that hardly any of their holders felt that they were going to pay a heavy price for revealing their cash holdings. The second is the actual income tax collections in the first quarter of the current financial year - as against the union budget’s annual estimates that there would be a 25 per cent increase over last year, the actual increase in the April-June period over the corresponding period in 2016-17 is just 10 per cent.
The NITI Aayog estimates for indirect taxes forecast relatively more modest gains from the introduction of GST - the indirect tax to GDP ratio, which was 5.6 per cent in 2016-17 is expected to increase steadily and progressively to 5.7 per cent, 5.8 per cent and 5.9 per cent respectively over the next three years. Overall, though one can say that the measures already taken by the current government as well as those that might result from following the TYAA are unlikely to guarantee realisation of even modest tax revenue targets.
The projections for central government expenditure made in the TYAA are also striking – they actually promise an expenditure compressing policy! With the fiscal deficit targets of the FRBM Act being considered sacrosanct, the projections of revenue yield a central expenditure to GDP ratio in the next three years which are lower than the level of 13.2 per cent in 2015-16, in the baseline, high growth and low growth scenarios. If revenue shortfalls occur, as they might, the expenditure compression may be even more severe.
Clearly thus, we are not entering into any phase in which fiscal policy would be actively used to address several imbalances in the Indian economy which are holding up its progress (and the fiscal deficit is not really one of them) and to expand demand. As such the fiscal pressures are likely to be only reinforced so that like its predecessor, the Narendra Modi government will also go into the next general elections on the back of savage cuts in expenditures like those on food and fertilizer subsidies, education and health. Much more than that earlier government, however, is this one’s ability and proclivity to deploy several weapons that it has in its arsenal to stifle all protest. The impossibility of winning the next elections by delivering on the promise of “Achhe din” will only serve to give added fillip to this. The real “action agenda” may thus be much more wide-ranging than the effective inaction on fixing the economy promised by the TYAA.