Borrowing numbers for second half just don’t seem to add up
When the government announced the Rs.145,000 crore tax break for Indian companies, the immediate impact was on the bond yields. The argument was that the government would be resorting to more borrowings and a higher fiscal deficit. But, the government has held its second half borrowings at Rs.268,000 crore. How will the gap be bridged?
Expects slow move to 22%
The government is most likely betting that the move to 22% tax will not be en masse, but a lot more phased out. The companies that pay lower taxes today or those with MAT credits will continue with the old tax system. That should include most of the Nifty companies. Hence the impact on revenues should be much smaller. Secondly, the view of the government is that the tax loss could be largely compensated by the exemptions and rebates foregone.
Betting on tax base boost
The government has been constantly harping on the need to widen the tax base. The belief could be that this 22% tax will bring more companies under the tax bracket and compensate for the lower rates. However, that may be more of a medium term goal than a short term goal. As we have seen in the case of income tax, even when compliance improves, it does not necessarily lead to higher tax revenues. Hence revenue boost may not work in this year.
A big push to privatization
On this subject, the government has been playing its cards pretty close to its chest. But there are indications that the government may give away traditional aversion to minority shareholding in PSUs and that could be a big revenue booster. The government has already identified BPCL, CONCOR and Shipping Corporation for complete sale and privatization. That could elicit a lot of investor interest and give a big push to revenues. If the government can quickly get its act together on the subject of strategic sale, then the revenues could get a real push and compensate for the gap in revenues. This can work but will require speed and expertise in terms of planning and execution.
Some avoidable ideas too
Of course, push comes to shove; the government may be forced to adopt more short term measures. It has already asked the RBI for an interim dividend of Rs.30,000 crore but that is a temptation best avoided. It is nothing but monetization of deficit. The other alternative is to convert borrowings into off balance sheet items. This is again best avoided as the organization comes under pressure. Finally, the option of cross stake sale is always there, but that may not add much value. One thing is certain that the government has an ace up its sleeve to bridge the gap. One only hopes it is actually GDP accretive!