Tax cuts may impact fiscal deficit, capex - Economists - Eastern Mirror
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Tax cuts may impact fiscal deficit, capex – Economists

By IANS Updated: Sep 20, 2019 8:51 pm
Finance Minister Nirmala Sitharaman addresses a press conference ahead of the 37th meeting of the GST Council, in Panaji on Friday. (PTI)

New Delhi, Sep. 20 (IANS): As the exuberance of stock market and corporates over the tax cuts settles downs, economists and experts on Friday warned of fiscal slippages due to such reduction that may impact fiscal deficit, capital expenditures and cause higher borrowings.

Though the positive effects of the changes are also not ruled out by them economists also said the cuts may not exactly boost consumption, investment demands in a big way.

“We expect today’s announcement to provide a big boost to business sentiment in the immediate term, with a modest knock on impact on consumption demand, particularly for big ticket items. However, the impact on fresh investment activity may be visible with a lag,” Aditi Nayar, Vice President, Principal Economist told IANS.

Former chief government statistician Pronob Sen said, “It is certain concern for fiscal deficit of 3.3 per cent which will be under pressure. The tax cuts pushes up for more borrowings due to gap between revenues and expenditure. But if they want to keep the fiscal deficit under control, they have to cut capital expenditure as from revenue side they can cut very little like cutting PM Kisan Card. But in a slowing economy, if you cut capital expenditure, it does raise an alarm.

“It is actually more worrying now with such kind of tax cuts as it is not going to have an expansionary impact immediately but if you cut expenditure it may have an immediate contractionary impact. That will further sink the economy. Inflation may go down further.”

“It can’t be. This is a tax on profits which come at the end of the year. In order to determine how much you can pass on depends upon your estimate of how much you expect to sell. And that’s not easy to work out in advance. There may be some insignificant reduction in price,” N.R. Bhanumurthy, Professor at National Institute of Public Finance and Policy said.

“3.3 per cent of fiscal deficit was never a sacrosanct number. It was given under an assumption of 8 per cent GDP growth and 12 per cent nominal growth both of which have been proved wrong as of now. But it is difficult to predict to what level it may go up as new policy measures are coming at regular intervals almost creating uncertainties and is a situation of ‘work-in-progress’.

“Tax cut and tax revenues are not linear function. There may be some increase in tax base due to the announcements will increase to some extent tax revenues. If the government has ruled out sovereign borrowings programmes, then an additional 10 billion dollars worth of money has to be generated internally. With the recent government measures, all these have fiscal impact. It now depends how RBI assesses the situation.”

For the current fiscal the fiscal deficit is 3.3 per cent. As per the July 5 Budget, the government’s own capital expenditure (capex) is projected to rise a shade less than 7 per cent in 2019-20 (FY20) to INR 3.38 trillion. In her maiden Budget presented in July this year, Finance Minister Nirmala Sitharaman had pegged the Union government’s market borrowings to be at INR 4.48 lakh crore in FY2019-20. According to sources, Centre may scale down FY20 tax aim by INR 1 lakh crore. The government has kept a direct tax target of INR 13.35 lakh crore for FY20.

Officials say the government needs to collect INR 1.10 lakh crore to INR 1.13 lakh crore a month to stay on course on GST collections, which hasn’t been the case at all so far.

The effective tax rate for these companies shall be 25.17 per cent inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax. The total revenue foregone for the reduction in corporate tax rate and other relief is estimated at INR 1,45,000 crore, the Finance Minister had said.

By IANS Updated: Sep 20, 2019 8:51:17 pm