State of Public Finance

Sameer Kochhar, Author of ModiNomics, Defeating Poverty and Reforms Historian
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The notion of Rs 1.45 lakh crore revenue loss due to recent cut in corporate taxes by Prime Minister Narendra Modi government is misplaced as the resulting improvement in the economic activities would bridge major part of the losses, experts said at the 61st SKOCH Summit.

The notion of Rs 1.45 lakh crore revenue loss due to recent cut in corporate taxes by Prime Minister Narendra Modi government is misplaced as the resulting improvement in the economic activities would bridge major part of the losses, experts said at the 61st SKOCH Summit.

Speaking on the ‘State of Public Finance’, Gopal Krishna Agarwal, National Spokesperson – Economic Affairs, Bharatiya Janata Party (BJP), said, “Revenue foregone is a complete misnomer. It is not the correct narration that should be promoted.” He explained why the government has chosen to cut corporate tax rates as a way to spur consumption demand and investments. “Private sector was saying that just transmission of lower interest rates will not be enough, consumption demand is needed for private capital formation to take place,” he added.

Explaining steps taken for improving the state of India’s public finances, Agarwal said that the Modi government had undertaken reforms aimed at improving the quality of government expenditure by reducing leakages through use of technology and Direct Benefit Transfers.

To keep the fiscal deficit within target, even after the loss of revenue due to the recent corporate tax cuts, Agarwal said, the government would raise non-tax revenue through disinvestment, “Government has no business to be in business in many areas”.

However, Rathin Roy, Part-time Member, Economic Advisory Council to the Prime Minister & Director, NIPFP, said the revenue foregone would be substantially lower than the figure currently being debated. India’s fiscal situation, Roy said, was difficult. But, at the same time, the challenges to India’s public finances were not new. The constraints were real, structural and more than fifteen years old.

The central government’s total spending, he said, has shrunk from 20 per cent of GDP to nearly 13 per cent now. While its commitments – such as defence, salaries and pensions and repayment of past debt – had shown little let up. The first time the centre borrowed for recurring expenditure, he explained, was in 1981. Before that, the centre borrowed only for financing its capital expenditure. By 1991, 24 paise of every rupee, the centre was borrowing was to provide for recurring expenditure. By 2001, this was 42 paise and had risen to 72 paise in 2013. In 2017-18, this was lower, but still high at 64 paise.

In these circumstances and with the centre devolving roughly 42 per cent of the tax revenues to be shared with states, there is little choice for it to rely on anything other than non-tax revenue, such as transfers from the Reserve Bank of India or cesses on taxes, as those are not required to be shared with states. The centre’s increased reliance on these sources, he explained, was a natural outcome of the structural issues in public finance and not political considerations.

Agarwal said the government has taken a lot of measures in the past 4 to 5 years to improve credit supply. Now the need of the hour is to work on generating demands for the credit. “Lowering of the corporate tax rate is one way through which the government is trying to increase the demands,” he added.

While the government expenditure is desirable and critical at this juncture to revive the economic growth, some argued that the focus should be improving the quality of expenditure.

Renu Kohli, Independent Economist, said the growing fiscal deficit, especially in the states, is a worrying trend and if not controlled it would lead to a crisis like situation. She said while there are a lot of talk about cut in subsidies and revenue expenditure the ground reality is exactly the opposite. The government’s expenditure on subsidies has risen to close to 1 per cent of GDP from earlier 0.8 per cent of GDP. Moreover, there is a lack of transparency from the central as well as the state governments on the direction of public expenditure.

She added to Roy’s point about the centre’s fiscal position being constrained, highlighting how even the states’ fiscal positions could come under stress and cautioned about a repeat of the earlier episode when state’s outstanding debt had to be written off at the time of extending the coverage of the Fiscal Responsibility and Budget Management (FRBM) Act to state finances.

She said she wasn’t expecting any immediate impact of the tax cuts, as the effects by way of changes in the returns on investments would become visible only in the medium to long term.

Tehseen Poonawalla, Political Trendwatcher, said the revival of the India’s economic growth is possible only through boosting consumption. “We are not an export driven economy. We never were. We have always been a consumption driven economy,” he said.

The debate is not whether the fiscal deficit is 7.8 per cent or 8 per cent or more, but that, “we don’t know what the number is because the government is not transparent.”
He further said that the worst affected by the economic slowdown are those engaged in the informal sector or 90 per cent of India’s workforce, which were hit by demonetisation followed by the introduction of the GST. “This is not one nation one tax, this is one nation, many taxes,” he said of the disruptive nature of the GST. “Nobody is getting their GST refunds,” he added.

On the matter of whether the policy choice of corporate tax cuts was superior to a boost for disposable incomes in hands of consumers in the context of the urgent need for spurring consumption demand, T K Arun, Editor, Opinion, The Economic Times, said that the Modi government’s decision, as can be seen from the stock markets’ reaction, had lifted the sentiment.

Taking stock of the big picture, he said, when the reforms began in 1991, the central government played a role in India’s public finance that was larger than life. He said, it was far bigger than all states put together. “Today, the Centre’s expenditure is 42 per cent of the combined expenditure of the states and the centre. Therefore, to look at India’s public finances, you must look at the aggregate expenditure and tax collections by the states and the centre.”

For that to happen, he said, credible corporate governance, enforcement of accounting standards and an ethical and credible auditing ecosystem will have to be ensured by the government. That these conditions are met can only be ensured by the government and regulation, he pointed out.

Yamini Aiyar, President and Chief Executive, Centre for Policy Research, said too much focus on curbing corruption has led to a situation where the decision making has taken a hit resulting in slowdown in economic activities. “Post 2008, we promoted oligarchy capitalism,” said Aiyar adding that the dominance of just a handful of people on the economy led to corruption and the government is now finding it difficult to get its path right.

Lastly, Aiyar said, the government should be careful of the message that is going out to those new taxpayers that are coming forward to join the tax system when large companies are seen being vocal about complaints about the tax system and high tax rates.

 

(Sameer Kochhar can be reached at skoch@skoch.in)

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