Budget 2018: LTCG impact on markets is for short term, says Subhash Garg

"We are right now at about 47% debt-GDP. Bringing it down to 40 per cent requires many years," says Garg

A day after Budget 2018-19, Economic Affairs Secretary Subhash Garg defended the Centre’s fiscal stance and said that any revenue concerns arising from the goods and services tax were now a thing of the past. In an exclusive interaction with Arup Roychoudhury, Garg said upheavals in equity markets were expected after the Budget announcements on long-term capital gains tax, and that the impact on markets would be a short-term one. Edited excerpts:

One of the big concerns arising out of the Budget is the slippage from the fiscal consolidation path. You are now aiming for a fiscal deficit target of 3 per cent of the gross domestic product by 2020-21. However, to reach a central government debt-GDP ratio of 40 per cent, you are giving yourself even more time, till 2024-25, through proposed amendments in the FRBM Act... 
 

We are right now at about 47 per cent debt-GDP. Bringing it down to 40 per cent requires many years. You can not adjust this in the next five years. In fact, there are some concerns that even if we were to achieve a 3 per cent fiscal deficit in 2019-20 itself, we will not be able to achieve the 40 per cent target by 2025. It is not an easy target. A fiscal deficit target of 3 per cent is one independent variable, the debt target feeds into it. It also depends on how much nominal economic growth takes place, what are the yields that remain in place, and various other factors. However, the government’s resolve and commitment to fiscal consolidation is in place.

The two biggest reasons this year that led to a delay in the fiscal consolidation roadmap were the GST and non-tax revenues. How do you expect them to pan out in the coming fiscal year?
 

I think the characterisation that fiscal consolidation is being delayed is not proper. It is only one year’s pause. The Centre has statutorily bound itself to be at 3 per cent by 2021. We may actually achieve this in 2019-20. Coming to the GST, I think we have a fairly good sense that GST revenues are stabilising now. Revenues have stabilised and started rising. All over the country, the GST has more or less stabilised. There are no more glitches you hear about. The e-way bill issue is expected to be sorted out in the next two weeks. Apart from that, the GST is fully stabilised, revenues have stabilised. We have projected a CGST of about Rs 600 billion per month next year. That conveys the government’s confidence.

On the dividend part, there are a couple of things that have changed materially. One is that the RBI used to earn about Rs 600-800 billion a year. That has come down to a lower level largely because of appreciation of the rupee. Depreciation adds to the profits of the RBI. The other one is resource auctions. A lot of that has been done earlier, so there is less this time. The third one is that there were large undistributed reserves in many public sector companies. In the last two years they have very aggressively distributed their resources. They are also running out of that phase. So all that is reflected in this year’s non-tax revenue receipts.

The markets are spooked because of concerns surrounding the announcement related to the long-term capital gains tax…

The LTCG was expected to have an impact on the markets. Yesterday (Thursday), the impact in the markets was not that visible. Today (Friday) it is. So we have factored in some short-term impact on the markets. This will be a short-term impact.

The finance minister said that gold would be made into an asset class. How does the government plan to make it a financial instrument? Who will regulate the proposed spot exchange?
 

We are working on a comprehensive policy. You will have to wait for that. There are a couple of ways we can develop this as an asset class, including getting standardised rates, getting it regulated, developing exchanges, active trading of gold through such exchanges, revamping the gold monetisation scheme. So we are working on a number of fronts. We are still working on the details.