The cut in tax rates on 178 items by the GST Council recently has got the market worried over the pressure on the exchequer, and uncertainty whether the government will be able to make up enough by way of revenues.
According to Chief Economic Advisor Arvind Subramanian there will be marginal impact of these cuts on the revenue but that will be compensated by compliance benefits. However, drop in prices will also help keep the lid on inflation, he told CNBC-TV18 in an interview.
During the Guwahati meet of the Council, there were expectations that land and real estate will also be brought under the GST ambit. Subramanian said land, real estate, petroleum products and electricity will now be on the agenda of the next meeting. Real estate will be considered first as a lot of black money is tied in this sector, he said.
The other sector that could get prominence in the next GST rejig will be electricity. “The taxes for electricity is embedded in the supply chain and kind of undermine competitiveness of Indian manufacturing,” said Subramanian. Bringing in electricity will be highly desirable. It will be part of how to make Indian manufacturing competitive, he added.
As for how GST is faring, he said it is too early to get a definitive assessment of how the new tax regime is performing.
On disappointing exports growth numbers reported yesterday, a decline of 1.1 percent to USD 23 billion, Subramanian noted non-oil exports are a little over 9 percent which is substantially higher than what the country did 8-9 months ago. He said the non-oil export growth has picked up from 2016.
However, he added India is under-performing in comparison to its peers like Bangladesh.
He said it would take few more months to know whether India has put behind the transitional challenges coming after demonetisation and GST and has achieved higher pace of export growth.
Below is the verbatim transcript of the interview.
Q: There are plenty of questions that the market would like clarified from you and the first of these is exactly the fiscal deficit and how does it fare after this giant cut over 200 items of goods and services tax (GST) rates?
A: I think that it is fair to say that underlying fiscal numbers will have to look at as the year progresses, but the marginal impact of the cuts in Guwahati those are going to be manageable and they themselves are not going to have any serious impact on the overall fiscal deficit because there has been a cut, which of course in the first instance will lead to some reduction in revenue. However, I think it can be off-set partially or wholly by compliance benefits and also by progressively as the base expands, so the impact of that is one.
Second of course is that whatever the revenue impact is going to be the flip side is that there is also going to be some reduction in the price level as a result of those cuts. So, it kind of works both ways. So to some extent I think – to the extent that bond markets look at that as well I think that also has to be factored in as a positive development, which will keep a lid on inflation this year going forward.
Q: We got that number from the GST council that Rs 20,000 crore is the impact of the tax cuts. That is an annualised number, right? That is not a four month number or a five month number?
A: That is an annualised number. Also, that is a number that is what we would call in the economics ceteris paribus which is that all else being equal – that doesn’t factor in compliance benefits, expansion of the base, any implied impact on the price level and so on. It is a kind of limited calculation.
Q: If you can just tell me therefore that would the GST council therefore look at cutting the rates for the other just 22 percent of the items in the 28 percent bracket? If the impact is so minimal and if it will come with attendant benefits would cement, paints and other uses of mass consumption also be considered?
A: The thing is that – recall that the way the GST council has gone about this, I would call this a strategy of pragmatic incrementalism, which is that you have to balance competing concerns.
On the one hand, I think everyone has recognised, the GST council and everyone, that the 28 percent slab was very high. It also led to complications and high prices and so there has been a very consistent movement towards paring down items in that slab and that is what you have seen.
Of course at every point in time you have to also balance, exactly the point that you raised earlier that they are going to be revenue losses from that. So, how do you balance that and that is the way the GST council has gone about it.
I think items like cement and stuff are big revenue earning items. I think the GST council will take a view over the next few months how are revenues faring and then the more there is comfort and reassurance that we can kind of in a sense fiscally afford it, more those decisions will be taken. I think the direction is absolutely clear that the 28 percent slab, eventually you want it to be nothing more than what we call de-merit goods even in the report that I authored. So, that is the destination and I think we are progressing towards that much quicker than many had anticipated.
Q: That report of yours which is I think the intellectual foundation of all these rates was also arguing for fewer slabs. You see that principle being adopted in the months to come?
A: Absolutely, I think these are all decisions further paring down the 28, reducing the number of slabs, these are all going to be on the agenda going forward because I think everyone has recognised I would say for example that in a country like India a tax policy is maybe – I don’t want to exaggerate – a lot of tax administration because the simpler the structure easier the administration. So, the need for simplicity and lack of complexity is well recognised. I think on the 28 percent, we are moving and at some stage we can cut down maybe one more slab, I think then we would be approaching even the structure that I had recommended in that report. So, we are headed in that direction because the principle that there should be few slabs, a simplicity is now absolutely completely embraced.
Q: I take your point and I guess some of the fears also have now realised or are now found to be unfounded if you please for instance the banking sector, the insurance sector, the telecom sector were seriously worried about 30 registrations. It has not been all that complicated at all for them, therefore in that spirit do you think GST council is also on the verge of accepting real estate or petro goods sometime soon within the GST ambit?
A: Before we get to that, I also want to emphasise that in the spirit of simplicity and reducing complexity I think the other major decision that was taken at Guwahati, which perhaps has not received the attention that it deserved was the fact that the compliance burden specifically GSTR-2 and GSTR-3 that compliance burden has been significantly reduced so that for sometime at least those two forms which were creating a lot of problem those have also been temporarily put aside. That is another big improvement in compliance burden that has happened apart from the fact that the composition scheme with the threshold that could go up from Rs 1-1.5 crore that also so the notion of simplicity extends not just to the tax structure but also to the compliance burden.
Now coming to your question, I think that land and real estate was on the agenda at the last meeting but we just could not get to it because of lack of time. It is going to come back on the agenda probably even at the next meeting. I think that the parallel exercise of how do we expand the base land and real estate, electricity and then of course petroleum and natural gas products, I think those are all going to be on the agenda going forward.
Land and real estate is first up and there too there is a kind of lot of positive momentum building that this would be a natural complement to the other actions that the government has taken because a lot of black money is tied up in land and real estate. If we could clean it up bring in more transparency I think that would be a big step forward. So I think there too the general sense is that we are moving in the right direction and that there is a shared understanding, not universal maybe as yet but a wideningly broad shared understanding that we need to expand the base and land and real estate need to be brought in sooner rather than later.
Q: This is perhaps one of the healthiest development, would you expect that within this fiscal since you say it is in the agenda of the next meeting including land into GST?
A: Putting a timing is always very difficult because remember it has to be decided by the GST council whether a lots of competing, sometimes divergent interest, bringing forging a consensus is not easy always. But just as we saw with the 28 percent, we saw with the simplification there is momentum building in that direction on land and real estate. So, it is very difficult to say March, April, May but I think we are moving in that direction. I think that is all one can say at the moment. It is a very positive development.
Q: I did not forget the procedural improvements that were announced in Guwahati. I am coming to that in just a minute but before that you referred to the consumer price index (CPI) as a one of the advantageous, which the bond market ought to take cognisance of what is your own calculation? How much might it bring down, how much might it impact CPI -30 basis points, 40 basis points, 50 basis points?
A: I haven’t done the exact calculation but I have seen estimates between 20 and 40 basis points for that. It sounds plausible. I think the other sector which I think is very important to bring into the ambit of the GST is electricity because I do think that electricity taxes get embedded in the supply chain and kind of undermine the competitiveness of Indian manufacturing. So from a competitiveness stand point giving Make in India boost, I think bringing in electricity would also be something that would be highly desirable. So, land and real estate has a virtue that it is part of the cleaning up, transparency, corruption agenda, I think electricity would be part of how do we make Indian industry more competitive part of that agenda.
Q: And there is a buy in for that from the council?
A: We will move slowly in that direction as well over the next few months.
Q: Let me just complete the other fiscal deficit worries that pushed the bond yields up. There are couple of things that the market was obviously worried about crude going to USD 65 though it is off that level now as well the way in which the market borrowing program has been arranged after mid-January there is only Rs 5,000 crore that has been apportioned for the next five weeks giving the feeling that more borrowing will be put in those weeks what is your sense will the government need to borrow more?
A: Let us first understand why bond yields have been rising. I think at least a two or three factors have come into the play I think first of all oil prices have gone up. That is one important factor that you mentioned. I think also that for example US treasuries have also gone up by 20-25 basis points and this sense that now if you do get a tax cut in United Stated I think that would also lead to higher interest rates and so there are external factors in play.
I think there is also to be fair that the sense in the markets perhaps rightly or wrongly that the direction of the monetary policy is now going to be in one direction and not kind of evenly balanced maybe there is that perception as well.
So all of those are factors affecting bond yields and then of course over and above that will be the fiscal situation. I think on the fiscal situation as I said, it is a bit early to get a sense of where – because remember it is not just what is going to happen on revenues and expenditures, it is also going to depend on capitalisation and how government structures that recapitalisation as well.
There are lots of issues there how should these be recapitalised in a way that doesn’t crowd out other borrowing. So these are all decisions that will be made over the next few months and it is too early to say will borrowing go up or come down. Let us take stock once the data come in and once big decisions have been made on recapitalisation and so on.
Q: Since you allude to recapitalisation, can you give us some update on how it is designed. It is going to be via a recapitalisation bond, is that right and will there be a special SUUTI kind of undertaking setup which will issue any updates at all on the structuring of the bond, SLR, non-SLR, held-to-maturity (HTM), non-HTM?
A: Nothing has been decided as yet. I think the government is having intense discussions on this, consulting widely and I think these are decisions that will be made over the course of the next weeks and months perhaps. However, government is aware of all the factors that go into decisions on how to structure these recapitalisation bonds and I think that at the end of the day I think some very measured, calculated decisions will be taken.
One important consideration will be how not to unsettle bond markets as well. So, the principal and the objective is well recognised. I think the details will have to be worked out, are being worked out and over the course of the next few weeks and months.
I was also saying, the financials have to come in for the state banks and so on, so, let us see. A lot of more data is also required in terms of how exactly to structure the recapitalisation, how should we allocate it across the banks, and the issues that you raised – SLR, whatever tradeable, etc. all the stuff that have been talked about in financial markets, I think government is acutely sensitive to those factors and they will be incorporated in a very kind of measured manner as government takes these decisions.
Q: In that case, can the market at least assume that it is going to be a recapitalisation bond because repeatedly news reports surface that the Reserve Bank of India (RBI) will be asked to help in capitalising some of the banks. Is that also a conversation that is happening, asking RBI to give an interim dividend?
A: I think government is having serious internal discussions. These are all things that may or may not come into play, but the government has certainly made its own plans based on its own assessment of how much money to put in and how to put that in and so at this stage, I think these discussions are underway and all these things will be taken into account.
Q: Just to finally end the fiscal deficit discussion part, there are some who believe that even now the GST collections are a little more than what they were expecting. What is your final assessment of fiscal deficit? We were starting with a bit of a disadvantage in terms of the RBI dividend being lower, in terms of spectrum revenues being lower, and in terms of some of the cess’s been given up by the government though of course it may come back in the form of GST. So are we even on fiscal deficit or is there a very good chance that it is a little more than 3.2 percent?
A: I think the point that you raised on the GST, I think it is important to underline that we have only had three months of data so far and it is not enough at this stage to come to a definitive assessment of how GST is faring. For example, the IGST collections, not all of that has been settled. So we won’t know how they will be settled until the whole refund mechanism, the transitional credits, all play out. So it is too early to get a considered, definitive, assessment of how GST is performing. So, we need at least another two to three months of data before we make a considered assessment.
The same thing holds for the other items of revenue, both tax revenue and non-tax revenue as well. These are early days, there is a lot of seasonality, and there is also in terms of the non-tax revenue, these things become clearer as you approach the end of the fiscal year. So let us wait and see before we come to an assessment. I think it is too early to say, but let us see. Then there is the whole recapitalisation agenda as well. So, it has to be a kind of considered assessment, taking all the new factors that have come into play as well.
Q: So you won’t put an upward risk to the fiscal deficit number of 3.2 percent?
A: At this stage it is premature to do upward or downward at this stage.
Q: Let me come to that procedural parts that you were saying. One will expect that of course to play out in the months to come, but for the moment, the export numbers, we were running at a USD 22-23 billion export number for a better part of 2017. We did not seem to be participating in the global recovery probably because of the demonetisation and then the GST disruption. September was a pleasant surprise but again we are down in October. So is there some niggling GST worry that is keeping our exports down? What is keeping exports down?
A: First of all I think if you look at the non-oil export growth, if you kind of do the seasonal adjustment in all of that, I think for the last few months, we have been running at about — I think my estimate is about 9 percent non-oil export growth seasonally adjusted three month, not moving average kind of thing, which is substantially greater than what we were doing eight-nine months ago. So the trend in terms of non-oil export growth has picked up relative to where we were for much of 2016 for example.
Q: Is that average after yesterday’s numbers because garments have fallen by 40 percent almost, so, looking worrisome?
A: I did do the numbers after yesterday’s numbers, so these are moving averages. If we do the moving averages, we are running at about little over 9 percent on non-oil exports which is much higher than the 1-3 percent we were doing for much of 2016. So there has been a shift up, but as I said, the question is are we picking up commensurate with what we know other Asian economies are picking up. They are doing gangbuster export growth; Bangladesh, Vietnam, South Korea, are also doing much. So the question is whether we are doing as well as they are or not. We need to look at that a little bit more carefully.
Also, I think we need to see when we stabilise after the early stages of the GST implementation. So I think towards the end of the year, early next year, we will get a better sense of, having put the teething whatever transitional challenges behind that, are we at a significantly higher pace of export growth or not. Also then we will get the data on GDP at the end of the month. We did see that the IIP for the second quarter was not spectacular but it was better than the first quarter. So, where we are going to stabilise, is the momentum back in the right direction, we will also get to know when the GDP data for the second quarter comes out.
Q: As you say, we are underperforming the region and several of our peers in terms of export growth. Would you visit that on the GST transition, therefore any sops on the way for exporters in terms of not having to pay the taxes and then claim it back, any procedural ease on the cards?
A: Remember that on the export, we changed, in fact not this but a more than a month ago, exporters, we gave them relief by saying that they would not have to pay the IGST on imports. I think there was that procedural benefit that was given. We also allowed them to use the old drawback until the end of September. So, I think the government is very acutely aware of the problems of the exporters. We are going to be monitoring constantly.
However, remember that just in order not to overburden and blame the GST, our export performance also is affected by a lot of other factors. I think that the general state of the economy, the twin balance sheet problem, the level of interest rates in exchange rates, all of these play into export performance. I think that one should not just attribute all these just to the GST, although the GST, the transition, may have some impact as well.
Q: Usually the health of destination countries overpowers all this. But at this point in time, it is not.
A: You are right, but at this stage you are right about the state of demand in international markets, but that has been turning favourably for all exporters. So, your point is a very valid one.
Q: I want to end this conversation by asking you about the general state of growth itself. The argument has been made even by the RBI and people in government that Indian economy had slowed even before demonetisation and GST. Now is that niggling slowdown still a worry? Look at the October numbers, look at the PMI, look at the auto sales numbers and exports now. Is there a niggling worry that slowdown is still there and therefore, the number we will get for November 30 as well as the overall GDP number for the year could be a disappointment?
A: I think that I am completely waiting for the November numbers because you are getting indicators in all directions because certainly the IIP improved in the second quarter relative to the first quarter. Export growth, notwithstanding yesterday, has been, as I said, if you look on a more long-term basis, growth has been higher than in the past. But, there are also other factors weighing on the economy. So I, at this stage, will reserve judgement until the November numbers come out and see whether both the level and directionally where we are headed. I want to wait for that.
Q: What is your working number though on GDP for the current year and for the November quarter, if you have?
A: We had a number in the survey in July, August, when we brought out the survey. We made clear what our thing was. We said that we expected it not to be in the higher end of the range that we had originally forecast, maybe more towards the middle or the lower end of that range which is close in line with what the consensus is for the year as a whole. So let us just wait and see whether the November numbers are in line with those forecasts or not.