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Informist, Thursday, Jul 18, 2024

 

--I-Sec PD Prasanna: Centre's fiscal gap needn't go below 4% of GDP

--I-Sec PD Prasanna: Centre needn't cut fisc gap beyond stated path

--CONTEXT: Centre aims to lower fisc gap to below 4.5% of GDP by FY26

--I-Sec PD Prasanna: Need to change FRBM aim of 3% fiscal deficit

--I-Sec PD Prasanna: Centre should keep fisc gap at 4.0-4.5% of GDP

--CONTEXT: I-Sec PD Head of Research Prasanna's comments in interview

--Prasanna: Govt may peg FY25 fiscal gap aim at 5.0% of GDP

--I-Sec PD Prasanna: Govt may use RBI surplus partly to cut fisc gap

--I-Sec PD Prasanna:Govt may use RBI surplus partly to give tax sops

--I-Sec PD Prasanna:Centre must mull merging both income tax regimes

--I-Sec PD Prasanna: See bumper RBI surplus transfers for next 2 yrs

--I-Sec PD Prasanna:See RBI surplus near 1.5-2.0 trln rupee next 2 yrs

 

By Shubham Rana and Pratigya Vajpayee

 

NEW DELHI – The central government does not need to continue to focus on fiscal consolidation once it achieves its target of lowering the fiscal deficit to 4.5% of GDP by 2025-26 (Apr-Mar), according to A. Prasanna, head of research at ICICI Securities Primary Dealership.

 

"I think the old FRBM (Fiscal Responsibility and Budget Management) formula of 3% as a stable fiscal deficit has to be changed," Prasanna told Informist in an interview. "So, probably we should move towards 4% or 4.0-4.5% as a more stable fiscal deficit regime for the central government."

 

The government's fiscal deficit had risen to an all-time high of 9.30% of GDP in the pandemic-hit year of 2020-21. In 2021, the government laid out a fiscal consolidation roadmap, under which it set a target to bring down the fiscal deficit to below 4.5% of GDP by 2025-26.

 

In the Interim Budget for 2024-25, the government pegged the fiscal deficit for the year at 5.1% of GDP. Last year, the Centre's fiscal deficit was 5.6% of GDP.

 

"Once the government achieves a fiscal deficit of 4.5% in 2025-26, I don't think there is too much that needs to be done on the consolidation side," Prasanna said. The consolidation beyond 2025-26 could be gradual, with the government lowering the deficit by 0.1% or 0.2% of GDP for the next two to three years, he said. "Then, we end up in the midpoint between 4% and 4.5%, I think that's good enough."

 

According to Prasanna, there is no need for the government to push the consolidation theme further because even in the periods when governments came close to the 3% fiscal deficit target set out in the Fiscal Responsibility and Budget Management Act, 2003, "it was achieved by pushing out some of the stuff off the Budget".

 

"Once you added all of them, the true deficits were closer to 4%. So, I think 4?n be a red line," he said.

 

For the current year, Prasanna believes the government may lower the fiscal deficit target by 10 basis points to 5.0% of GDP in the Union Budget, which will be presented on Jul 23, thanks to the higher than expected surplus transfer of 2.11 trln rupees by the Reserve Bank of India.

 

The government is likely to share the additional funds transferred by the RBI equally to reduce the fiscal deficit and to increase spending, the economist said. "The extra RBI dividend is roughly 1.2 trln rupees, slightly more than 50?n be used to increase revenue spending and capex and also maybe give some tax sops," he said. "The balance you use it to cut the deficit down.

 

"Since that excess amount from the RBI dividend compared to what is budgeted is so large, there is no stress on the government's finances," Prasanna said.

 

The Centre can use the extra funds to focus on revenue expenditure in the full Budget rather than capital expenditure, Prasanna said. Operational and management constraints could be affecting capital expenditure, with the rate of growth of capital spending pegged in the Interim Budget sharply lower compared to the previous Budgets, he said.

 

"So, in that sense, there is a limit to how much your capex can grow. Obviously, it has to keep growing faster than the nominal growth, nominal GDP growth. But probably, that growth is slowing down," the economist said. 

 

The Interim Budget for 2024-25 pegged the government's capital expenditure at 11.11 trln rupees, up 16.9% from the revised estimate of 9.50 trln rupees for 2023-24. The Centre's capital expenditure for 2023-24 was projected at 10.01 trln rupees, up 37.4% from the revised estimate of 7.283 trln for 2022-23.

 

The government can, and should, provide relief to taxpayers, thanks to the excess funds at hand, by raising the standard deduction amount, Prasanna said. "It is better to keep the thresholds low but offer slightly higher deductions. I think they should do this and this time, they have the opportunity to tinker with it," he said.

 

The Centre must also look at merging the two tax regimes as the current system creates "a lot of confusion", Prasanna said. "The new tax regime is good. By keeping both the regimes running parallel, it just leads to confusion."

 

"If you say that I'm cutting taxes to boost consumption, and then you say that it's only in the new regime and the old regime continues with the old tax rates, it may not be effective," he said. "Then, it depends on how many people choose the new tax regime. To avoid that confusion, I think they might want to decide that once and for all, we are moving to the new regime, but maybe offer more sweeteners."

 

Providing relief on the personal income tax front would also be sustainable for the government right now, as it could expect bumper surplus transfers from the central bank for another year or two, Prasanna said.

 

"I feel the RBI dividend has entered a higher plane or a new normal. It may not be 2.1 trln or 2 trln plus every year, but I think broadly 1.5 to 2 trln kind of dividend numbers are possible for one more year, maybe for a couple of more years also," he said.

 

"The RBI's asset base has gone up and global interest rates don't look like they're going back to the zero interest rate regime. In this environment, the dividend has actually entered a new normal."

 

Higher dividend from RBI could be pencilled in for a few more years down the line, which obviously gave the confidence that some tax cut could be attempted, Prasanna said.  End

 

Edited by Avishek Dutta

 

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