InvestorQ : The government is giving Rs.145,000 crore as tax benefits but its second half borrowings are the same as original. How is that possible and what is the government game plan?
swati Bakhda made post

The government is giving Rs.145,000 crore as tax benefits but its second half borrowings are the same as original. How is that possible and what is the government game plan?

Answer
image
Dia Deshpande answered.
2 years ago
Follow

At this point of time, your guess is as good as mine. I agree that it is a little surprising how the government has retained its H2 borrowing target at Rs.2.69 trillion when it is planning huge tax gifts. The natural assumption is that it will have to lead to more borrowings. Otherwise, how will the gap be bridged? While it is hard to say what the government has in mind, there are four possibilities which may answer your question.

· The most likely assumption of the government is that the move to 22% tax will not be en masse, but phased out. The companies that pay lower taxes today or those with MAT credits will continue with the old tax system, including most of the Nifty companies.

· The government may be betting on a lateral tax boost coming from better compliance. However, that is more likely to be a medium term goal than a short term goal. As we have seen in income tax cuts in the past, even when compliance improves, it does not necessarily lead to higher tax revenues.

· A more plausible explanation is that the government may be factoring in a big push to privatization. On this subject, the government has been playing its cards close to its chest. The government has already identified BPCL, CONCOR and Shipping Corporation for privatization, which could elicit a lot of investor interest. This can work at short notice but will require speed and expertise in planning as well as in execution.

· Finally, there is the risk that the government may look to adopt the easy way out. Such measures are avoidable but the government may not have much of a choice and may use them as temporary gap fillers. For example, the government has asked the RBI for an interim dividend of Rs.30,000 crore but that is nothing but monetization of deficit and the RBI should look to avoid such measures.

· The other alternative is to convert borrowings into off balance sheet items. This is something the government is already doing in case of parking food subsidies in the books of Food Corporation and oil subsidies in the books of downstream oil companies. There is also the option of cross stake sale but that is a lot more of accounting jugglery than anything else. One thing is certain that the government has some ideas why it has not raised its borrowing target.

What is really important is that the measure is finally positive for GDP growth rather than just accounting shifts.

4 Views