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    Budget needs to focus on fiscal consolidation; govt must restart reforms: Arvind Panagariya

    Synopsis

    “It is time to signal that the government wants to return to fiscal consolidation. I would recommend at least symbolically 0.5% to 1% reduction in the fiscal deficit from the current 6.8% level. But I also have in mind some reform agenda.”

    Arvind-Panagariya-1200ETMarkets.com
    “It is time for the government to announce something on trade that has been much neglected. It is an area, in which we have rolled back liberalisation and protection has risen. Higher education is the second area where we need a lot of action and finally we need an expansion of the tax base,” says Arvind Panagariya, Professor, Columbia University

    Why is this such a crucial Budget in the context of the third Covid wave which has not hit people too badly in terms of health but has caused disruptions to the economic recovery once again?
    Arvind Panagariya: I will point out two things; one, this is a critical Budget because we are still coming out of the pandemic and in this sense, it is a continuation of the crisis. Probably, it is a little short term but there is a crisis and that is the first reason.

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    The second of course is the fact that this Budget is going to come on the heels of the reversal by the government on the farm laws and so there are some apprehensions as to whether that is going to fundamentally alter the course of the government in terms of reforms. So, what signal the Budget gives post withdrawal of the farm laws, is very critical.

    A lot of experts are saying this Budget is going to be greatly influenced by the five state elections that come after it and part of it will focus on what next after the farm laws have been repealed? Farm incomes were supposed to have doubled by 2022. What form and fashion can this politically inclined Budget take?
    I hope it is not purely politically inclined and there is some balancing done in the Budget. After all, the Budget is supposed to be for the entire country and not for the states where the elections are happening alone. We might see one announcement – maybe it is a speculation but an announcement has already come is – a very large hike in fertiliser subsidy. That clearly is influenced by the fact that we have these elections, particularly in Uttar Pradesh and Punjab – both states with very large farm populations.

    So, we might see some kind of subsidisation and populism aimed at large sections of populations or SMEs because a very large part of the non-agriculture workforce is in SMEs. Those are the things we may say on the expenditure side but I hope there is a balancing act on the revenue side as well as the deficit and most importantly on the reform side.

    Are you concerned whether we will hit the fiscal deficit target at 6.8%, considering revenues, especially tax revenues are expected to be buoyant?
    The government should have no difficulty in achieving the 6.8% target. There are two reasons: One, revenues have been very buoyant and across the board, income tax, GST and corporate profit tax collection have been higher than what was in the BE (budgetary estimates). So, the revised estimates could exceed the budgetary estimates by 20-25%. This one factor should make the task of getting to the 6.8% target relatively easy.

    Second, the GDP growth has been robust and we are remember that we are measuring the fiscal deficit as a proportion of the GDP and the GDP goes in the denominator and that also is likely to be larger than what may have been the case in the BE. For both these reasons, I will be quite surprised if the target is not met.

    What do you think is the biggest challenge? In India, people have been talking about a muting of consumer demand partly because of the Covid third wave and also because of the kind of impact we had seen in rural India. What can the government do to increase consumption?
    My take on this issue is a little different and I hope, a little more nuanced than most others. Remember that at the end of the day, GDP is the sum of consumption of government spending, investment demand and net exports. The critical thing is that the GDP has risen by 9.2%. That is our kind of advanced estimate by MOSPI (Ministry of Statistics & Programme Implementation. This has been supported by demand.

    Somewhere the government spending has been robust and that has returned to a level which is fairly well above the pre-Covid level. Investment has returned also and it is also fairly above the pre-Covid level. So investment demand has happened. Net exports have done well and that is also very good. So at the end of the day, as a residual that leaves private consumption which has not returned to its pre-Covid level and evidently it is not inconsequential the that the private consumption has not returned to pre-Covid level because wherever the consumption demand is well below where it was, those particular industries evidently suffer.

    So, for them, it is consequential but the aggregate demand has successfully supported the 9.2% growth. That is the positive aspect that I see and private consumption will come back. In bits and parts, some of the sectors have done well and perhaps at the high end, the expenditures have been quite robust. As you pointed out, rural India is at the lower end of income distribution and there may be a little more leg there. But I am concerned about it. As the next six months’ figures begin to come, we will see the consumption demand also returning.

    The big fear to me is whether this pandemic will turn into endemic so that we can return to normal lives with no fear of lockdowns. I think that ultimately is the most important factor.

    So you do not think that the government needs to fret too much about boosting private consumption right now, where there is an increase in allocation of NREGA or some kind of easing of pressure on personal taxes?
    I would be more in favour of infrastructure building. If you want to increase spending, let us increase where it is also going to boost growth while providing jobs to the kinds of workers where the demand right now appears tepid. Even rural roads for example will employ people in rural areas. That is where I would put the focus and not certainly on tax cuts because tax cuts have a habit of not disappearing and our tax to GDP ratio really is abysmal. That needs to rise, not fall.

    I am waiting to see whether the 20% tax to GDP ratio that we observed in 2021 is going to hold out in 2022 I am not sure that those numbers are still to come through in the budget but what we actually need to broaden the tax base which is very narrow currently and I would rather not income tax rates at the low end are really low already so I would not recommend that.

    What should be the top priorities for the finance minister while delivering this Budget?
    I would hope that now at least symbolically, we return to fiscal consolidation. The debt to GDP ratio is actually quite high today and IMF estimates that we will cross 90% now when the Budget comes out. Remember that even if the government is paying 6% interest on bad debt, that amounts to 5.4% of the GDP and that is a very large part of the government’s expenditure side taken away by just the interest payments.

    Of course, when you pay interest, that cuts into the rest of the expenditures. So, we need to ensure that we do not raise the debt further. There are two other reasons. One is that we are basically passing on the burden to the taxpayers for the future. So, future generations are being stuck with extra debt to repay and also when the government borrows too much, then it crowds out the private investment.

    At the end of the day, there is only so much financially intermediate savings are available and if the government takes away the large chunk of it, then this will leave a lot less for the private investment and now that the private investment is actually returning, it is showing robustness. This will be a bad time to crowd it out.

    So for those three reasons, I would say that it is time to signal that the government wants to return to fiscal consolidation. I would recommend at least symbolically 0.5% to 1% reduction in the fiscal deficit from the current 6.8% level. But I also have in mind some reform agenda.

    Please go ahead. I must say though the expectations for any radical reforms this time around are relatively lower because of elections, especially the crucial UP elections being round the corner. What do you think can be prioritised now?
    First of all, it is time for the government to announce something on trade that has been much neglected. It is an area, in which we have rolled back liberalisation and protection has risen. Perhaps there is less appetite on the part of the government to lower the tariff rates but we ought to go aggressively on the free trade agreements.

    I am also very encouraged by some of the statements from Secretary Commerce BVR Subrahmanyam that he intends to pursue free trade agreements and there have been other reports at least that assigning some sort of FTA with the UAE may be imminent. There is negotiation underway with the UK and European Union, Australia etc. If that is the case, I would like to see that put in the Budget speech upfront. That will be a very good indication that we are not running away from globalisation but we seek market access for our exports in these large markets especially the European Union. But the UAE is also a good market for us and so some announcement on FTAs will be very helpful.

    It will also be good if there is some liberalisation as well. It is often argued that tariffs that go up to 40% or rise all the way to over 100%, really do not do any good to anybody and indeed those are prohibitive levels. No imports are coming in and so we are not even collecting any tariff revenues. Also, are you punishing the consumer who ends up paying extra prices relative to what the rest of the world pays? So that is on the trade side.

    Higher education is the second area where we need a lot of action. Practically, nothing has happened in that area in spite of reforms having begun in 1991. The University Grants Commission Act of 1956 is an almost 60-year-old Act. It needs to be replaced by a more modern Act and numbers of things have to be done.

    Third, we need a broadening of the tax base. All this cannot happen in the Budget itself but some intention has to be shown because it has to be negotiated. Coming to direct personal income tax figures, in 2018-2019, only 1.5 crore out of a population of 138 crore, paid income tax. Probably close to 5 crore file their taxes, but only 1.5 crore have paid taxes. Widening of this tax base has been a serious challenge and it is very unlikely to happen because no government will tax the farmers or farm incomes even in urban areas.

    So 45-50% of the population are left out of the tax base. One can tax the rich and wealthy more, but that is a very low base. The tax to GDP ratio has been stuck for many years at 17%. Only one year it has gone to 20% and we need to see whether that trend holds. It seems that unless we are willing to tax the masses, we are not going to raise the tax to GDP ratio and that is where, the GST instrument has to be utilised more effectively.

    About 50% of the goods in the consumer price index basket are out of the GST net completely. Then we have got a number of products which are taxed at the low rate of 5%. We need to bring all those goods into the tax basket into GST and then we need to unify the tax rates to something like 12% and 18%. Redistribution should be done. In India, there is no disagreement on redistribution. Everybody says that things should be done for the poor but redistribution should be and can be done through expenditures.

    Let us raise the taxes at least in an efficient way so that a decent amount of tax revenues come in so that we are not dependent on increasing the debt every year and then do the redistribution through expenditures. That is a more efficient way to achieve equality and combat poverty.

    We are going through uncertain times. There are geopolitical issues on the horizon; the Federal Reserve plan for faster interest rate hikes has spooked global markets. High crude prices persist. Do you look at these as serious headwinds in the year to come or do you think we are resilient enough?
    I expect the US economy to continue to do well. The US economy at least is not suffering in the way some others are. China seems to be doing okay also. So the two largest economies in the world are doing reasonably okay. Inflation is high in the US but we should not read inflation in the US as inflation in India. Our inflation rate has been within the RBI assigned target of 2% to 6%. So, I am less concerned.

    We have discussed just now that the private consultant demand has been tepid rather than overly excessive. So far, we are still waiting for demand to recover. Even if 5% inflation is there and it seems high, it is because of the supply constraints. So, we ought to work on those and that is where I will be worried.

    Globally speaking, the bigger challenge remains from Covid. There are some obvious stock market effects of the possibilities of interest rate hike in the US. But I do not expect a major threat to India in the sense of the way it happened in the summer of 2013 when the rupee depreciated by a massive amount.

    My own take is that this is a good opportunity for the RBI to let the rupee depreciate a little because it will make our products more competitive vis-à-vis foreign products so that our domestic products become more competitive vis-à-vis the foreign imports. This also gives a shoulder to our exports. This is the time for the RBI to let the rupee depreciate a little bit and take advantage of it so that a challenge can be turned into an opportunity.

    The major fear to me still remains the possibility of modest lockdowns that automatically happen even if the government does not announce any measure. If Covid spreads, people are afraid to go out and that causes de facto lockdowns, no matter how small. They then impact economic activity and that remains a threat to watch more than anything else for the global economy.

    Do you think that this budget should extend special help for sectors that have now been hit by a third wave like hospitality, tourism, airlines etc.?
    I would lean against government lending specifically to some sectors and it should operate more on a general level. Whatever needs to be done in terms of helping people overcome the crisis situation – the kinds of things we were doing during Covid – providing food, providing shelter has to be provided to anybody who is in that kind of situation, whether in rural or urban areas.

    Beyond that, sectorally in terms of entrepreneurial activity piling more heavily on policies that cut across the sectors and allowing the entrepreneurs to respond to those incentives, demand and sectors like hospitality, transportation, tourism, hotel have remained tepid because people cannot engage in those activities as these are contact intensive activities. So, even if we lend a hand through special expenditures, if contact does not happen because of the pandemic, it won’t work. So, ultimately the issue is helping those badly impacted tide over the prices and not so much the industry itself because the industry will ultimately be helped only by the pandemic turning into endemic.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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