Emerging Markets : Tax Revenues And Spending On The Rise

INDIA

The fiscal year 2003-2004 (April-March) was wonderful for the Indian government, with unprecedented levels of tax collection.That inflow set new records for direct and indirect taxation and gave the government a lot of fiscal flexibility. But if the figures coming out of the Ministry of Finance for customs and excise revenues (indirect taxation) for the first six months (April-September) of the 2004-2005 fiscal year are any indication, then last years figures will easily be surpassed, with a new record set for government revenues in India.

Despite cuts in customs duties on crude oil imports by value, the largest imports into Indiathat cost the Indian government $1.1 billion in revenues for the first six months, indirect tax revenues are higher by 9.5% over the corresponding six-month period last year. For the first six months the indirect tax collection has been $15 billion, of which excise collections composed the larger chunk at $10 billion, recording a higher growth rate at 10.3%. Customs collections came in at a slower growth rate of 8.5%.

The numbers might partly explain why the government finally seems to have shrugged off its reticence over the fiscal deficit and has decided to channel a higher deficit toward investment spending.About $5 billion of the $120 billion foreign exchange reserve will be used to provide a capital subsidy to infrastructure projects.The subsidy will be used toward funding the import of capital goods for the infrastructure sector.

The government hopes to monetize foreign exchange reserves by issuing bonds to the Reserve Bank of India (RBI). For infrastructure projects, around 15% of the project cost accounted for by imported capital goods, thus the $5 billion capital subsidy, will generate activity in $30 billion to $35 billion worth of projects.

Aaron Chaze