Last week, the finance minister announced a cut in corporate income tax rates. The total revenue the government will forgo due to a lower corporate income tax and a few other changes is expected to be around 1.45 trillion. How will this impact the fiscal deficit? Mint takes a look.

1) How will the fiscal deficit change?

Fiscal deficit is the difference between what a government earns and what it spends. The fiscal deficit for 2019-20 has been projected at 7.04 trillion or 3.3% of GDP. Up until the decision to cut the rates, the government expected to earn 7.66 trillion through corporate income taxes. The collections will now be lower. Everything else remaining the same, with the drop in revenue collections of 1.45 trillion, the fiscal deficit is likely to touch 4% of GDP. This comes with the assumption that GDP in nominal terms (not adjusted for inflation) will grow by 12%, which looks increasingly difficult at present.

2) Does the government have another option?

The fiscal deficit can be even higher than 4% if GDP does not grow by 12% as the budget expects it to. One way the government can cut the fiscal deficit is by reducing expenditure. But finance minister Nirmala Sitharaman clearly said the government has no plan to cut expenditure as of now. In the period April-June 2019, government expenditure grew by 8.9% and even with this, the overall economy grew by just 5%. Hence, government expenditure has become very important for overall economic growth. Given this, the finance minister’s comment hardly comes as a surprise.

With the government borrowing more, there will be less money left for other borrowers
With the government borrowing more, there will be less money left for other borrowers

3) So, is there no way out of this situation?

One option for the government is to push through genuine disinvestment by selling public sector enterprises (PSEs) to private firms. It should avoid one-PSE-buying-another kind of sham disinvestment. The buying PSE ends up borrowing money. This debt should be on the books of the government, not the PSE. Selling excess PSE land can also help bring in revenue.

4) What problems is the govt likely to face?

There will be stiff resistance from trade unions. Also, the Rashtriya Swayamsevak Sangh does not like the idea of PSEs being sold. Nevertheless, any semblance of economic reform in India has happened in times of crisis; that’s something the government can forcefully use to push through genuine disinvestment. Even with this, the entire fall in corporate income tax collections cannot be recovered. Hence, the fiscal deficit is bound to rise. This means the government will have to borrow more to meet its expenditure.

5) What will happen if the govt borrows more?

With the government borrowing more, there will be less money left for other borrowers. This will push up interest rates. The government has been constantly talking about lower interest rates to revive the economy. What does not help is the fact that the government is expected to earn 23.2 trillion from its five big taxes this year. Even this was 20% more than what it had earned last year. Hence, the fiscal deficit will go up.

Vivek Kaul is an economist and the author of the Easy Money trilogy.

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