Budget 2020 India: Arguing against a major restructuring of personal income tax at this juncture to give relief to taxpayers, former chief economic adviser Arvind Subramanian said on Tuesday that instead, the forthcoming Union Budget (2020-21) ought to bring back honest accounting of the Centre’s finances and refrain from rolling out any additional fiscal stimulus. Rather than coming out with any surprises or making dramatic announcements, the Budget should set realistic and modest targets, without any undue stress on fiscal consolidation either, he said at the Indian Express Group’s Idea Exchange programme here.
According to Subramanian, income tax relief might have only limited impact on consumption, as only 5 per cent of population pays the tax. Instead, he favoured a greater push to schemes like the PM Kisan, National Rural Employment Guarantee Scheme or a universal basic income (UBI), to cater for a larger population that is under stress and stimulate demand to contain the slide in growth.
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Following the recent slashing of corporate tax rates, the clamour for a cut in the personal income tax rates has grown shriller. When asked about this, finance minister Nirmala Sitharaman recently said if the government opts for reducing income tax, it would purely be on the basis of intrinsic merit of such a step, rather than in relation to the corporate tax cut.
Noting that there is a growing opinion that many economies might have erred on the side of fiscal prudence, Subramanian said it would still not make a case for India to loosen its fiscal policy given the consolidated primary deficit (fiscal deficit less interest payments) of the general government here remained high and interest rates exceeded GDP growth rate. Also, he was sceptical about the government’s ability to spend quickly and meaningfully to bring about a push to economy of the required magnitude and topicality. Economic growth slowed to a 4.5% in Q2FY20, the lowest quarterly growth since Q4FY13.
He said the current slowdown is intense but said there was no longer any “magic bullet” for the short term to fix the economy, suggesting structural remedies would probably do the trick, with focus on agriculture and power-sector reforms.
Although GST collections have been trailing the targets month after month, Subramanian thinks the indirect tax structure is being blamed harshly. Faltering collection, he said, is the symptom of the broader economic slowdown instead of a typical GST-related or compliance problem. The government shouldn’t raise the GST rates at this juncture when it’s otherwise aiming at improving consumption. Once the economy gets on to its feet, maybe after two quarters or so, the GST system could be cleansed, he said, referring to the GST base computed by a panel headed by him and the revenue neutral rate of a little over 15%.
The recent sharp corporate tax cut was a necessary step but its efficacy will depend on other complementary steps, the former CEA said.
Given the government’s propensity to mask actual fiscal deficit by resorting to extra-budgetary spending, the former CEA recommended that the Centre undertake a detailed and “honest accounting” of its balance sheet. But he advised against extending an additional fiscal stimulus on top of the already-expanded balance sheet. However, Subramanian argued against firming up an ambitious fiscal consolidation glide path that will ultimately be revised.
As for fiscal transparency, the government has in recent years raised its reliance on extra-budgetary resources to fund expenditure. Even excluding a big chunk of such borrowings for railways capex, the government’s extra-budgetary resources rose from Rs 2.73 lakh crore in 2016-17 to as much as Rs 5.27 lakh crore in 2018-19. Although the government has pegged such mop-ups at Rs 4.44 lakh crore in the Budget for 2019-20, given the revenue shortfall, this target will be missed, analysts have warned. The Comptroller and Auditor General of India said last year that off-budget capex and revenue expenditures understate fiscal deficit.
Appreciating the efficacy and usefulness of Insolvency and Bankruptcy Code regime in recovering the value of stressed assets, Subramanian, however, opined that the IBC system might not be conducive for power and real estate sectors, where social externalities distort markets and asset values are determined also by government policies.
Stating that his postulation that the GDP growth in India might have been overstated in recent years was based on sound analysis, he cited the wide incongruity between assorted high-frequency indicators and the growth figures (see chart). There was a need to rebuild confidence in data systems by revamping them across the board. Subramainan believes the slowdown might turn worse over Q3/Q4 before it starts moving upwards.
Source: Financial Express