Worst-case scenario is a 0.5% fiscal slippage: Ashima Goyal on tax cut

If towards the end of the year, government finds that the deficit is rising, then they may cut expenditure, Goyal said

Ashima Goyal, member of the Economic Advisory Council to the Prime Minister, spoke to Arup Roychoudhury on the corporate tax cuts announced by Finance Minister Nirmala Sitharaman, and the impact it could have on growth and the fiscal situation. Edited excerpts:

What effect do you think the latest announcements will have? 

The tax reductions announced today (Friday) will enable more entry (of new players) and lead to domestic firms opening more units, which are long-term assets. Immediately, you have seen the markets rally, that creates wealth asset. For individuals, the prospect of jobs increases. In India, you were suffering a lot from a crisis of confidence. That will be reversed I think, and that will lead to increased consumption. Other announcements before this will also facilitate that. Banks were recapitalised. But they should not just sit on that extra liquidity. That is why they have been told to go out there and lend more or co-originate with non-banking financial companies, while focusing on the credit risks.

April-June GDP growth came in at 5 per cent. Do you think following the announcements on Friday and over the past month, the rest of the year will see a revival? Can 7 per cent growth for 2019-20 be achieved?

In my view, the slowdown was cyclical. We had moved to a very tight monetary and liquidity regime, which created an unnecessary output sacrifice. Now, that has been recognised and there is a change. Growth can be revived. These measures are supply side, removing exemptions and moving to a simple tax structure. All that is very positive. But on the demand side, the measures taken to boost liquidity and interest rates coming down, will reverse the earlier condition. All of this together will surely help. I don’t want to get into numbers, but we can see a turnaround in the coming quarters.

What fiscal impact do you see from Friday’s announcements, given that the Centre says revenue foregone will be Rs 1.45 trillion?

We will have to see where we are with tax collections closer to the end of the year. When growth slows, tax collections also go down. You need a counter-cyclical fiscal policy. But the Fiscal Responsibility and Budget Management (FRBM) Act has closed that route for us. Even then, the FRBM Act allows a 0.5 per cent deviation in a year of real shock or structural change or tax changes. We will have to see if growth revives and tax collections rise. Then, the shortfall may be lower. This government is coming out with a well-thought-out interlinked packages. You are recapitalising the banks and restructuring them. But you are forcing them to go out and lend more. Then you are reviving market sentiment, you have divestment plans, the markets are ripe for divestment and asset monetisation. They may get money through that. If towards the end of the year, they find that the deficit is rising, then they may cut expenditure. In fact, the whole fiscal consolidation path could be reset from the coming year, following the Fifteenth Finance Commission’s recommendations. So, there are many uncertainties. Sitting today, we can’t say what will happen to revenue, expenditure and the fiscal deficit. Worst-case scenario could a 0.5 per cent slippage which is allowed in the FRBM. 

While markets have welcomed the announcements, did all these measures perhaps come a little too late? The signs of a slowdown were there even during Budget-making. Again, the government seems to have acted when there is a crisis upon us.

You must remember that the Budget was immediately after elections and the government was formed with a new finance minister. Given all that, it has acted fast. The Budget was produced in just a month of the new government coming in. We are now seeing action from the finance ministry, the Reserve Bank as well as the GST Council. This speed wasn’t there in earlier regimes. The government is talking to a lot of stakeholders, getting feedback, and then arriving on a set of responses. Given the fiscal constraints, it has come out with a lot of measures.