Why is govt's non-tax revenue falling, despite making much higher capital investments?
When govt makes investment on viability gap funding, it doesn't own any revenue assets until assets are transferred back to it (under BOT). In this situation, govt does not get higher non-tax revenue for its investment (ie. it has no new assets) and must rely increasingly on tax revenues, incl capital gains tax. But it is sound govt expenditure because the economic payoff is more than justified.
Take the case of UDAN. This has increased economic activity in tier 2 cities & NE region. Most NE folks are very happy with it. Govt benefits directly by increasing the airline business (which pay taxes) and airport infra is developed from revenues of air operations. Take metro rail: govts (centre & state) would be lucky not to lose money from running the metros (though they get indirect taxes) but metros still have a high economic IRR (>14%pa according to new metro policy ♫). Ditto with affordable housing, rural roads, gas pipelines, power connections, hospitals, schools, etc. For example, backward area roads are helping to wipe out insurgencies like Naxalism‡.
Govt will run out of revenue if it continues to sell off the 'family silver'. Where will the money come from?
Extra-budgetary finance (EBF) is huge. Rural infra spend is Rs14.35 lakh crore while Govt is only funding Rs 2.35 lakh crore out of budget. In other words, there is enough income stream from these projects to pay for Rs 12 lakh crore EBF!! For example, govt will open six new IITs, which cost upward of Rs20,000 crore⍒. Govt doesn't have budgetary capacity for this amount, and so it asked old IITs to increase their revenue streams and monetise their assets. It uses these monies to pay for new IITs. Same can happen for district medical collages.
Railways is making Rs 1.48 lakh crore investment in 2018-19 (double digit yoy increase) -- but IR has little funding of its own and receives only Rs 43,000 crore from govt. Most of these investments have sound viability, which is why IR can tap LIC or bond finance for EBF. Railways minister says IR will do EPC contracts for station modernisation (600 stations, up from 100!!) and monetise them once finished. Railways gets the job done quickly and starts earning non-fare revenue. For railways electrification, which is very viable, IR has organised borrowings from RECs# — which had earlier lent for discom losses!! Where viability is poor, like Mumbai suburban rail, World Bank is involved for concessional loans, and states contribute with land and grant.
On roads it is the same. There are some roads that are non-viable, but Gadkari (transport minister) has identified enough that can be tolled and monetised, to roll out a huge Rs 7 lakh crore Bharatmala program¶.
Will all this extra borrowing not affect GDP growth and endanger the future prosperity — why is govt taking so much debt?
IITs, airways, metro, rural infra, railways, roads are very much required, will contribute to GDP growth and even give a financial return in fullness of time. These assets will eventually be owned by the country. Govt pays its share from budgetary allocations, and doesn't need to sell off the family silver as such.
The reason govt is selling off some good assets is because it has a very ambitious social agenda like large-scale health insurance, primary healthcare, jobs creation, farmers welfare, education and inclusive growth. Strangely there are growth benefits from doing this type of social spending; also from selling off its inefficient companies, and simplifying GST. Govt wants to do as much as it can — I will not be surprised if it does all of the above!!
What can we expect in the future?
Govt would like to sign off by accomplishing all that it set out, and deliver the best possible results, be it on infrastructure and livelihood projects, or fiscal deficit and GDP growth. Macro-economic indicators should be closely watched.
Nothing is certain. Here is something to think about. GDP is growing fast, even when bound by tight fiscal and monetary policies. Tax buoyancy is very high because govt is uncovering and taxing undisclosed income† rather than soaking the same old salary classes, consumers and MSME corporates. It seems the country is getting more efficient in using its capital, but what happens when banks resume lending and and private sectors starts investing? Its fair to say the country is just starting to go after research, technology, manufacturing; and seriously taking on overseas projects for long-term (strategic) benefit. And all types of new jobs are/ will be created, in formal and informal sectors. Just imagine what the economy will be once people, especially women, start to fully participate in the workforce!
♫ https://www.indianeconomy.net/splclassroom/what-is-the-new-metro-rail-policy/
‡ http://www.theweek.in/news/india/road-construction-naxal-hit-districts-may-spell-doom-left-wing-extremism.html
⍒http://www.livemint.com/Education/HnGNUSlnYs30rOsN1Dm7tN/Centre-may-spend-over-Rs20000-crore-on-six-new-IITs.html
# https://steelguru.com/logistic/india-s-rec-may-fund-indian-railways-drive-to-electrify-entire-network-railway-ministry/494684
¶ https://en.wikipedia.org/wiki/Bharatmala
† http://www.financialexpress.com/economy/governments-monitoring-of-non-tax-filers-yield-rs-26425-crore-in-tax-till-december/1060651/
When govt makes investment on viability gap funding, it doesn't own any revenue assets until assets are transferred back to it (under BOT). In this situation, govt does not get higher non-tax revenue for its investment (ie. it has no new assets) and must rely increasingly on tax revenues, incl capital gains tax. But it is sound govt expenditure because the economic payoff is more than justified.
Take the case of UDAN. This has increased economic activity in tier 2 cities & NE region. Most NE folks are very happy with it. Govt benefits directly by increasing the airline business (which pay taxes) and airport infra is developed from revenues of air operations. Take metro rail: govts (centre & state) would be lucky not to lose money from running the metros (though they get indirect taxes) but metros still have a high economic IRR (>14%pa according to new metro policy ♫). Ditto with affordable housing, rural roads, gas pipelines, power connections, hospitals, schools, etc. For example, backward area roads are helping to wipe out insurgencies like Naxalism‡.
Govt will run out of revenue if it continues to sell off the 'family silver'. Where will the money come from?
Extra-budgetary finance (EBF) is huge. Rural infra spend is Rs14.35 lakh crore while Govt is only funding Rs 2.35 lakh crore out of budget. In other words, there is enough income stream from these projects to pay for Rs 12 lakh crore EBF!! For example, govt will open six new IITs, which cost upward of Rs20,000 crore⍒. Govt doesn't have budgetary capacity for this amount, and so it asked old IITs to increase their revenue streams and monetise their assets. It uses these monies to pay for new IITs. Same can happen for district medical collages.
Railways is making Rs 1.48 lakh crore investment in 2018-19 (double digit yoy increase) -- but IR has little funding of its own and receives only Rs 43,000 crore from govt. Most of these investments have sound viability, which is why IR can tap LIC or bond finance for EBF. Railways minister says IR will do EPC contracts for station modernisation (600 stations, up from 100!!) and monetise them once finished. Railways gets the job done quickly and starts earning non-fare revenue. For railways electrification, which is very viable, IR has organised borrowings from RECs# — which had earlier lent for discom losses!! Where viability is poor, like Mumbai suburban rail, World Bank is involved for concessional loans, and states contribute with land and grant.
On roads it is the same. There are some roads that are non-viable, but Gadkari (transport minister) has identified enough that can be tolled and monetised, to roll out a huge Rs 7 lakh crore Bharatmala program¶.
Will all this extra borrowing not affect GDP growth and endanger the future prosperity — why is govt taking so much debt?
IITs, airways, metro, rural infra, railways, roads are very much required, will contribute to GDP growth and even give a financial return in fullness of time. These assets will eventually be owned by the country. Govt pays its share from budgetary allocations, and doesn't need to sell off the family silver as such.
The reason govt is selling off some good assets is because it has a very ambitious social agenda like large-scale health insurance, primary healthcare, jobs creation, farmers welfare, education and inclusive growth. Strangely there are growth benefits from doing this type of social spending; also from selling off its inefficient companies, and simplifying GST. Govt wants to do as much as it can — I will not be surprised if it does all of the above!!
What can we expect in the future?
Govt would like to sign off by accomplishing all that it set out, and deliver the best possible results, be it on infrastructure and livelihood projects, or fiscal deficit and GDP growth. Macro-economic indicators should be closely watched.
Nothing is certain. Here is something to think about. GDP is growing fast, even when bound by tight fiscal and monetary policies. Tax buoyancy is very high because govt is uncovering and taxing undisclosed income† rather than soaking the same old salary classes, consumers and MSME corporates. It seems the country is getting more efficient in using its capital, but what happens when banks resume lending and and private sectors starts investing? Its fair to say the country is just starting to go after research, technology, manufacturing; and seriously taking on overseas projects for long-term (strategic) benefit. And all types of new jobs are/ will be created, in formal and informal sectors. Just imagine what the economy will be once people, especially women, start to fully participate in the workforce!
♫ https://www.indianeconomy.net/splclassroom/what-is-the-new-metro-rail-policy/
‡ http://www.theweek.in/news/india/road-construction-naxal-hit-districts-may-spell-doom-left-wing-extremism.html
⍒http://www.livemint.com/Education/HnGNUSlnYs30rOsN1Dm7tN/Centre-may-spend-over-Rs20000-crore-on-six-new-IITs.html
# https://steelguru.com/logistic/india-s-rec-may-fund-indian-railways-drive-to-electrify-entire-network-railway-ministry/494684
¶ https://en.wikipedia.org/wiki/Bharatmala
† http://www.financialexpress.com/economy/governments-monitoring-of-non-tax-filers-yield-rs-26425-crore-in-tax-till-december/1060651/
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