In his interview with Karan Thapar for The Wire, Bibek Debroy, Chairman of the Prime Minister's Economic Advisory Council (PMEAC) acknowledged that the economy is in a worrying slowdown phase. This remark from one of the top economic think-tanks of the government is positive since admitting the problem is the first step to resolution. That's the first good news.
The second: At least now it appears that there is a consensus among government advisors (remember Rathin Roy and NITI Aayog vice-chairman Rajiv Kumar's warnings on state of economy) that out-of-the-box actions are necessary to save the economy, already projected to grow at a slower pace of less than 6 percent this year, from sinking deeper.
There are two major takeaways from Debroy's interview to salvage the economic situation:
1) Forget the 3.3 percent fiscal deficit target. In his interview, the PMEAC chairman made it clear that the government is set to miss the fiscal deficit target this fiscal year. In Debroy's own words, it is hard to say by how much it (deficit target) would be missed but there was no doubt it would be missed.
Comment: In a slowing economy, missing fiscal deficit targets aren't a surprise. The government is witnessing poor tax inflows (GST collection figures are indicative), while the pace of disinvestment is far from high targets. Moreover, the recent major corporate tax reduction announced by Finance Minister Nirmala Sitharaman would mean the government will have to sacrifice Rs 1.45 lakh crore hit on tax revenue. GST collections are lagging. As this writer pointed out in an earlier piece, even after the government getting a windfall from the RBI with Rs 1.76 lakh crore surplus transfer and a rumored Rs 30,000 crore dividend demand, it will be a tightrope walk for the government to hit the deficit target.
Revenue collections are painfully lagging. As against a 17.5 percent target budgeted for the full year, the government could mop up only 4.7 percent more so far, with the direct tax kitty growing to Rs 5.50 lakh crore as of 17 September, up from Rs 5.25 lakh crore a year ago. On the other hand, the government has already used 78.7 percent of the fiscal deficit room by August itself.
In absolute numbers, fiscal deficit crossed Rs 5.54 lakh crore against a target of Rs 7.03 lakh crore for the full year. Beyond the RBI dividend and reserves under ECF transfer, the government can dip into small savings and disinvestment route to raise money to meet the deficit. But, in a slowing economy, the room is limited. On the disinvestment front, the government has managed only Rs 12,357 crore so far as against the targeted Rs 1.05 lakh crore.
But the point is, given the state of the economy, the government shouldn't be worried too much about missing the fiscal deficit target. Instead, it should work on reviving the animal spirits of the economy by pushing investments and encouraging more spending at household level.
As Debroy says in the interview, a corporate rate tax cut is unlikely to do wonders in the economy in kicking off investment cycle and for that, the government must announce other measures to stimulate demand. To put it in simple language, it is high time the government cuts personal income tax rates by a good margin so that people will have more investible surplus. This will also be a psychologically positive move to consumers, particularly at a time consumer confidence is at multi-year lows.
2) Another important suggestion from Debroy is to simplify the GST tax slabs. During the interview, Debroy suggested that both zero and 28 percent tax slabs are to be abolished at the earliest, retaining only three"6 percent, 12 percent and 18 percent.
Comment: Debroy is bang on about pitching for a three-slab structure. Incidentally, at the time of the GST launch, former chief economic advisor to the government Arvind Subramanian too had recommended a similar structure. But the government chose to start with a five-slab structure and a couple of additional rates/cesses to get the ball rolling.
At that time, the explanation given was that given the complexity of the Indian markets, it is necessary to have a wider rate structure. But the experience, since then, shows that complexity in GST structure and the lack of planning in introducing a radically different indirect tax regime significantly contributed to tax evasion and thereby the economic slowdown.
This is exactly what Debroy is hinting here, arguing that the time is right to introduce a three-slab structure. The government should listen to Debroy and act before it is too late. Recent forecasts indicate the GDP growth for the full fiscal may fall even below 6 percent. For instance, Moody's Investors Service recently lowered its 2019-20 growth forecast for India to 5.8 percent from 6.2 percent earlier, saying the economy was experiencing a pronounced slowdown partly due to long-lasting factors. This is, by far, the most pessimistic prediction so far.
The short point here is that PMEAC chairman's warnings and prescriptions should be an eye-opener to the government in the present economic scenario. The biggest takeaway for finance minister Sitharaman is that the government shouldn't be skeptical about taking unorthodox measures to revive growth engines by pumping investments, putting more money in the household kitty and addressing past policy mistakes rather than merely focusing on fiscal deficit target.