Do government’s marginal GST cuts mean there is hope for fiscal discipline?
3 min read 23 Dec 2018, 11:55 PM ISTGovernment is likely to account for a good portion of its subsidy burden for the current fiscal in the next year
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Mumbai: When Prime Minister Narendra Modi said last week that more than 99% of product categories could be brought under a goods and services tax (GST) rate of 18% or lower, fears of fiscal indiscipline rose among investors.
For the stock markets, therefore, it has come as quite a relief that the tax cuts announced by the GST Council on Saturday will have only a minimal impact on tax collections. Although taxes were reduced on 22 product categories, the expected annual revenue impact is just ₹ 5,500 crore, according to finance minister Arun Jaitley. This amounts to less than 0.5% of the year’s target for GST collections.
Categories such as automobile parts and cement were left in the 28% slab because a cut in these products could have meant a hit of as much as ₹ 33,000 crore, Jaitley said.
Does this mean there is hope for fiscal discipline? “While a tax cut for cement would have been drastic, even the fact that air-conditioners have been left in the highest slab is a slight relief," said an economist at a multinational bank.
Of course, the fact that the relief is only slight can’t be overemphasized. After all, government expenditure has grown at a faster rate than revenue so far this year, implying that the absolute fiscal deficit target will be breached sooner than in fiscal year 2017-18, said the economist.
Coming back to GST collections, it must be noted that the monthly run rate until October has fallen way short of the target, as the chart above shows. Analysts at CLSA said in a note to clients last month that if the trend in collections continues, there is likely to be a shortfall of well over ₹ 1 trillion in GST collections for the full year.
“The shortfall in GST revenue is likely to result in a modest fiscal slippage, to 3.5% of GDP as against the target of 3.3%. The strong growth in direct taxes will act as a buffer and the government could also push for extra non-tax revenue through special dividends from PSUs or the RBI (Reserve Bank of India)," says Niranjan Rajadhyaksha, research director and senior fellow at IDFC Institute.
Some other economists and equity strategists are also working with a fiscal slippage number of 20 basis points, though there seems to be a difference of opinion on how exactly slippage will be contained at 3.5%. “With GST revenues remaining well short of budgeted targets, it is becoming increasingly challenging to stick to the fiscal deficit target without expenditure reductions. We maintain our FY2019 gross fiscal deficit estimate at 3.5% of GDP, including expenditure cuts; possibly in Q4 of FY19," analysts at Kotak Institutional Equities said earlier this month.
Rajadhyaksha, however, says that “expecting expenditure cuts in an election year is unrealistic".
The way out may be a quirk in the government’s accounting system. As a recent report in Mint suggested, the government is likely to account for a significant portion of its subsidy burden for the current fiscal in the next year with a view to managing the fiscal health. This has been done by governments in the past as well. The fact that only cash payments are accounted for by the government in any given period, expenditure pertaining to a certain year can be pushed to the next by postponing the release of payments.
Besides, as pointed out earlier, a special dividend from RBI can ease the pressure on the fiscal health, apart from buybacks and dividends by public sector companies.
From the looks of it, the stock market may not be particularly bothered how exactly the government does it, as long as it manages to keep the fiscal slippage within 20 basis points. After all, markets have been fairly accommodative in recent weeks, having taken the sudden exit of RBI governor and worries about a global slowdown in their stride.
