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Modi govt may spend more to spur growth as tax collection looks up

After limiting public expenditure so far in the current financial year, the Narendra Modi government could finally open its purse strings as the collection of goods and services tax (GST) is on the rise again.

Official figures show that for the second month in a row, India’s GST collection crossed the psychological Rs 1 lakh crore figure in November.

A higher government spending will be critical to support economic growth, which has contracted for two consecutive quarters.

While India clocked a 7.5 per cent contraction in its GDP growth for the second quarter of the current financial year, it is a “massive improvement” after the shocking lockdown-induced decline of 23.9 per
cent in the April to June quarter.

GST collections during November stood at Rs 1.04 lakh crore which is higher than the Rs 1.03 lakh crore collected in the corresponding month last year. In October this year, however, the GST collection was a tad higher at Rs 1.05 lakh crore.

Public spending, until now, has been subdued – a drop of 12 per cent — due to a tight fiscal situation and higher borrowing.

“The recovery in the economy has been primarily due to the performance of the manufacturing sector besides a pick-up in demand supported by the festive season, but what is worrisome is the slowing government expenditure. Going ahead, that will be critical to support growth, as in the coming months, consumption may not be the same as what was seen during the festive period,” DK Srivastava, EY’s chief economic adviser told IndiaNarrative.com.

“Spends in the current quarter and the next will go up. With improved GST collections, there is more fiscal room now and government expenditure will increase especially towards the rural sector,” Gopal Krishna Agarwal, BJP’s spokesperson on economic affairs said. Agarwal added that the labour and farm reform measures that have been
undertaken by the government would also help in drawing private investments in the coming months.

According to the State Bank of India’s Ecowrap report, GDP contraction has slowed down significantly due to the improvement in manufacturing after the lifting of lockdown measures, a 3.4 per cent growth in the agriculture sector has held steady. Credit growth in the banking sector also reflects a pick-up in economic activity.

“The services sector remained in the negative territory, although the decline was contained as trade, hotels, transport, communication and services related to broadcasting showed recovery,” the report said.

Even as India officially entered recessionary mode after its GDP growth contracted for two consecutive quarters, analysts now predict a much better economic performance for the full year.

Agarwal pointed out that public sentiment has improved as well with hopes of an early Covid 19 vaccine coming to India by the year-end.

Though India’s economic growth will not turn positive in 2020-21, the contraction will be “less sharper” than projected earlier. Last month, ratings agency Moody’s revised its India’s GDP growth forecast for this calendar year to a (-) 8.9 per cent from an earlier prediction of (-) 9.6 per cent.