As the exuberance of stock market and corporates over the tax cuts settles downs, economists and experts on Friday warned of fiscal slippages due to such reduction that may impact fiscal deficit, capital expenditures and cause higher borrowings.
Though the positive effects of the changes are also not ruled out by them economists also said the cuts may not exactly boost consumption, investment demands in a big way.
“We expect today’s announcement to provide a big boost to business sentiment in the immediate term, with a modest knock on impact on consumption demand, particularly for big ticket items. However, the impact on fresh investment activity may be visible with a lag,” Aditi Nayar, Vice President, Principal Economist told IANS.
“Today’s announcement would complement the expected further repo rate cut in the October 2019 policy review. We continue to expect a 25 bps rate cut in the upcoming MPC review. In light of the likely backended pickup in investment activity and expenditure restraint that would be required, particularly at the state government level, we are not yet revising our FY2020 GDP forecast upward from 6.2 per cent,” she added.
Former chief government statistician Pronob Sen said, “It is certain concern for fiscal deficit of 3.3 per cent which will be under pressure. The tax cuts pushes up for more borrowings due to gap between revenues and expenditure. But if they want to keep the fiscal deficit under control, they have to cut capital expenditure as from revenue side they can cut very little like cutting PM Kisan Card. But in a slowing economy, if you cut capital expenditure, it does raise an alarm.
“It is actually more worrying now with such kind of tax cuts as it is not going to have an expansionary impact immediately but if you cut expenditure it may have an immediate contractionary impact. That will further sink the economy. Inflation may go down further.”
Sen said RBI would now still go for a rate cut but of lesser magnitude. They might still look at 25-35 bps cuts instead of 100 bps cuts as was being talked of.
The Reserve Bank of India’s (RBI) monetary policy committee (MPC) in August lowered its repo rate by an unconventional 35 basis points to 5.4 per cent. He also raised the issue of transmission to the common man from corporates any lower rates.
“It can’t be. This is a tax on profits which come at the end of the year. In order to determine how much you can pass on depends upon your estimate of how much you expect to sell. And thats not easy to work out in advance. There may be some insignificant reduction in price,” N.R. Bhanumurthy, Professor at National Institute of Public Finance and Policy said.
“3.3 per cent of fiscal deficit was never a sacrosanct number. It was given under an assumption of 8 per cent GDP growth and 12 per cent nominal growth both of which have been proved wrong as of now. But it is difficult to predict to what level it may go up as new policy measures are coming at regular intervals almost creating uncertainties and is a situation of ‘work-in-progress’.
“But there is a need for fiscal stimulus when the economy is going through a cyclical and structural slowdown, when the economy needs such fiscal stimulus, worry about fiscal deficit should be kept aside. Now the the cut of corporate taxes, fiscal deficit would widen.
“Tax cut and tax revenues are not linear function. There may be some increase in tax base due to the announcements will increase to some extent tax revenues. If the government has ruled out sovereign borrowings programmes, then an additional 10 billion dollars worth of money has to be generated internally. With the recent government measures, all these have fiscal impact. It now depends how RBI assesses the situation.”
He said today’s corporate tax cut will not lead to any consumption demand but may create some investment demand. One part of demand story is taken care today. For consumption demand to rise, ministries should front-load their expenditures particularly in rural development ministry which has huge allocation on road, housing, MNREGA.
For the current fiscal the fiscal deficit is 3.3 per cent. As per the July 5 Budget, the government’s own capital expenditure (capex) is projected to rise a shade less than 7 per cent in 2019-20 (FY20) to Rs 3.38 trillion. In her maiden Budget presented in July this year, Finance Minister Nirmala Sitharaman had pegged the Union government’s market borrowings to be at Rs 4.48 lakh crore in FY2019-20. According to sources, Centre may scale down FY20 tax aim by Rs 1 lakh crore. The government has kept a direct tax target of Rs 13.35 lakh crore for FY20.
Both the GST and direct collections have been disappointing. As on early September, direct taxes are growing at 5 per cent against a budgeted growth rate of 17.3 per cent, a huge gap there to be flagged off. GST collections are also growing at 6 per cent, against a required growth rate of 15 per cent to achieve the FY20 budget estimates.
Officials say the government needs to collect Rs 1.10 lakh crore to Rs 1.13 lakh crore a month to stay on course on GST collections, which hasn’t been the case at all so far.
While a fiscal slippage now appears inevitable given that the government’s tax collections will fall substantially short of its budget estimates, expenditure cuts may still be required to prevent the fiscal deficit as well as G-sec yields from rising too sharply in FY2020. Additionally, lower central tax collections will impact the state governments’ fiscal situation as well through likely cuts in central tax devolution, and borrowing constraints may necessitate state government expenditure restraint or deferral.
The government has slashed the corporate tax rates to 22 per cent for domestic companies and 15 per cent for new domestic manufacturing companies and other fiscal reliefs in order to promote growth and investment, a new provision has been inserted in the Income-tax Act with effect from FY 2019-20 which allows any domestic company an option to pay income-tax at the rate of 22 per cent subject to condition that they will not avail any exemption/incentive.
The effective tax rate for these companies shall be 25.17 per cent inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax. The total revenue foregone for the reduction in corporate tax rate and other relief is estimated at Rs 1,45,000 crore, the Finance Minister had said.