What if the piggy bank is empty?

Fiscal deficit between April and November hit 112% of the full year target, the highest for 8 months since 2008. This was due to revenue shortfall, as tax collections reached Rs 5.46 trillion instead of the expected Rs 6.12 trillion. The government is to borrow an extra Rs 500 billion which may raise the fiscal deficit to 3.54% instead of the promised 3.2%. Bond prices fell instantly, raising yields to 7.33% on benchmark 10-year government bonds. Higher bond prices also signal higher inflation expectations from increased government spending. High inflation lowers the buying power of the currency which means by the time the bonds mature the value of their principal will be lower although the amount will be the same. Increased borrowing is a worry, though fiscal deficit is expected to stay within 3.2%, warned Bank of America Merrill Lynch. The new Goods and Services Tax, or GST, is being blamed as total collections in November came in at Rs 808 billion, compared to Rs 923 billion in July. But it is not just the GST. Economic growth has been slowing since June 2016 quarter as oil prices started to rise and imports jumped when demonetization disrupted supply chains., wrote M Chakravarty. As this government came to power in 2014 the price of crude oil started falling from over $100 per barrel to around $30 per barrel. As the price of crude fell the government increased taxes on fuel, keeping pump prices the same. This provided enormous windfall gains to the government, allowing it to spend lavishly without adding to the deficit. A kind of inverted resource curse. Although tax revenues rise from higher oil prices the government might have to lower tax rates on fuel to keep pump prices and inflation in check, wrote P Pengonda. A reduction of Rs 2 in rates results in a Rs 250 billion fall in tax collections. Cooking gas price was being slyly increased by Rs 4 per month but has now been stopped to preempt anger of consumers. Poor people were provided with free gas connections and cylinders from the oil bonanza but are unable to refill their cylinders even at the subsidised rate of Rs 485 per cylinder. Not good for elections. Once a social scheme is started it is impossible to stop without causing an uproar, so plans to phase out subsidy on gas has been shelved. The only solution is to go after taxpayers. Surveillance on taxpayers is to become severely intrusive with officials accessing any information they want. People will be interrogated on the source of money deposited into banks due to demonetization. To raise tax collections the government must treat taxpayers with respect, wrote Prof K Jha and give us services, such as old age pensions, healthcare and education for children. Paying huge taxes to subsidise luxurious lifestyles for politicians and their broods is hardly an incentive. This war will not end any time soon.