International agencies and the Reserve Bank of India have pronounced their verdict on India’s economic growth estimates for the fiscal year ending March 2020. They have unanimously cut the growth forecast by up to 1.5 percentage points. Now, it is the government’s turn to revaluate itself.
When the Central Statistics Office (CSO) revises the growth forecast, it is expected to give the steepest cut because the government has a better idea than any outside agency of how it is faring.
Insiders reckon that the CSO may pare the economic growth estimates for this year in the range of 5.8% to 6%. If that comes true, it will be disappointing because it may delay India’s dream of becoming a $5 trillion economy by a few years. The entire world is slowing but India’s slowdown is more “severe” as per the International Monetary Fund (IMF). Finance Minister Nirmala Sitharaman is fresh from attending IMF/World Bank annual meetings and will have a better handle of how the two international institutions weigh India’s current economic situation vis-a-vis the world.
The finance minister has spent a lot of time in the US, hard-selling her post-Budget announcement on corporate tax rate cut and convincing foreign investors that India is now the most attractive destination for business.
She has also spent an equally large amount of time in defending her government’s economic priorities and policies after it came under an all-round attack from many economists, including former Reserve Bank of India Governor Raghuram Rajan. A little later, even the Nobel winner and India-born economist, Abhijit Vinayak Banerjee has joined the chorus.
Cut in I-T rates likely
Whatever be the posturing by the government, the mandarins of the finance ministry are burning the midnight oil to stack up more measures to lift the economy. Officials have told DH that the finance minister is keen on preparing a blueprint of direct tax rate cut on her return from the US.
She is keen on complimenting the recent corporate tax rate cut with an equally attractive reduction in the personal income tax rates. The task force on direct taxes code has sought a major cut in the personal income tax. It has recommended shortening of slabs and cutting the tax rate by half for each slab.
Finance ministry insiders, however, are sceptical. “There may not be such a large fiscal space. The revenue implications of implementing the task force recommendations in toto, will be unsustainable,” they said. An official, on the conditions of anonymity, said that they were also working on an alternative of giving a large personal income tax cut in the coming year (2020-21) and partially withdraw it when the economy looks up.
“We are working on various alternatives. But there are revenue constraints. The GST has not given the desired revenues so far. We are hopeful of a better collection post-November. If the revenue position of the government is not comfortable, any decision on personal income tax rebate will be postponed to February when the Union Budget is presented,” an official told DH.
The DTC task force has sought a 10% income tax rate for individuals earning Rs 5-10 lakh per year in place of the current 20%. It has accordingly sought a reduction in upper slabs and a cap of 35% on incomes above Rs 2 crore. Besides, the task force has recommended doing away with surcharges and cess. The government, however, is in no mood to accept all its suggestions and that is precisely why it has not acted on the report in the past over two months. The DTC panel had submitted its report to the finance minister in the middle of August.
GST rejig soon
Work is also in progress on certain rejigs on the Goods and Services tax (GST) front. A 12-member panel is working on a major restructuring on GST, two years after it was launched.
Besides, a bunch of public sector companies are being sorted out for strategic sale in which a substantial portion of the government’s shareholding (up to 50%) goes into private hands. Besides Air India and BPCL, BHEL, the Container Corporation of India, Shipping Corporation, and ITDC hotels are getting ready for either disinvestment or asset monetisation. The government has in the first six months of the fiscal garnered only Rs 12,357 crore through disinvestment. Disinvestment this year has become more important because of the extra-budgetary expenditure.
An inter-ministerial group is soon expected to be formed to expedite disinvestment of PSUs. The Prime Minister’s Economic Advisory Council, Niti Aayog, the department of Investment and Public Asset Management (DIPAM) and Ministry of Finance have been asked by the PMO to work with a view to attract buyers for government companies. They have been asked to make the offers lucrative, albeit within the norms. Three economists from JP Morgan, Credit Suisse and Kotak Securities have been appointed to the PMEAC to suggest ways to smoothen the divestment process. But even if the government achieves its target of Rs 1.05 lakh crore of asset sale this year, the corporate tax cut along with the additional direct cash transfer to farmers is expected to burn a big hole in its pocket.
The government has not come clean on what could be the fiscal deficit this year after the giveaways and that has made the investors wary.