The Hindu
News story by Bharat Kumar
13-Feb-2018

Arun M. Kumar last week completed a year as chairman and CEO of KPMG in India. Prior to this, he had served as Assistant Secretary of Commerce for Global Markets and Director General of the U.S. and Foreign Commercial Service in the Obama Administration. He led the trade and investment promotion efforts for the U.S. government and served as the International Trade Administration’s lead official advocating for better market access for U.S. exporters. In an interview, he dwelt on the Indian Budget.

Is the government a bit too optimistic on projections? Forecast for nominal GDP growth is pegged higher than that for expenditure growth.

Expenditure is a matter of choice. GDP may grow at any rate while a government may decide to actually reduce expenditure, and, therefore, reduce taxation, and leave more money in the hands of the people, thereby increasing consumption and consumption-led growth. Hence, there need not be a correlation between GDP growth and expenditure forecast.

Isn’t a 67% jump in revenue projections for GST on the higher side, given collections have been inconsistent?

The government is positive about achieving higher growth in GST revenue in the coming year through implementation of the e-way bill mechanism, enhanced focus on vigilance and preventive machinery to check evasion, and simplified compliance processes. The depletion of the credit pool transitioned to GST may also be anticipated to contribute to this projected increase in revenue.

An analysis of GST collections indicates that the highest collection (₹95,000 crore) was achieved in the month of July 2017 when several commodities were included in the 28% slab and the lowest collection was in the month of November 2017 (₹80,000 crore) when the list of items attracting 28% was pruned.

The key factor highlighted as a catalyst for growth by the government is the e-way bill system; but, given the recent experience of system failures, it may be challenging for the government to achieve the forecasted revenue unless voluntary compliance becomes the norm and not an exception.

The government seems to favour the debt-to-GDP ratio as a metric to track, and seems to have abandoned revenue deficit. Your view?

The budget speech or the document does not really indicate that the government has abandoned revenue deficit as a metric to track the economic health of the country. It continues to be an important metric which gets reflected in the focus on the fiscal deficit target and conversion of the fiscal deficit target into a band. The government debt to GDP is a separate metric that the government would like to track as it provides a more accurate sense of how much the government can borrow, keeping in view the size of the economy. As India grows, the government debt can grow as long as the government debt to GDP ratio stays healthy.

What do you think of the slippage in fiscal deficit target this year?

In absolute terms, there is no sacrosanct principle in terms of fiscal deficit targets. The principle of fiscal consolidation and the underlying Fiscal Responsibility and Budget Management Act are self-imposed to provide guidance to investors on the glide path that the government will adopt towards fiscal consolidation from a period when the fiscal deficit was unacceptably high at 5.9% in 2011-12. However, when the economy is constrained due to limited investments and muted demand, it is necessary to increase public spending, while staying within an acceptable band.

This has also been the ask of industry chambers such as FICCI. Therefore, breaching the fiscal deficit target by 30 basis points appears to be an acceptable measure under the circumstances of the twin balance sheet issue.

However, it comes at a price of sending unfavourable signals to foreign investors, who would link the breaching of the fiscal deficit to inflation and, therefore, to weakening of the rupee, thus making the eventual returns of investors not only less attractive but also less predictable. Hopefully, this is a one-off deviation and as mentioned by the Finance Minister, the government will quickly come back to the predetermined glide path of fiscal consolidation.

Is the 3.3% target for FY19 realistic given that it would be an election year?

The government has declared a revised fiscal deficit target of 3.3% of GDP in FY19 and 3% of in FY20. We believe the government is determined to stay within the fiscal deficit target that they have laid out.

Should the government have revoked the STT?

Having effectively exempted long term capital gains (LTCG) earned up to January 31, 2018, the government expects the revenue from LTCG tax to grow gradually. The government might take a look at continuation of the Securities Transaction Tax in subsequent budgets, taking into consideration the collections from LTCG tax and market expectations. In any case, both the taxes (CGT and STT) have been operating for the past several years as short-term capital gains have been taxed at 15% with simultaneous STT levy on such transactions.

On the flip side, if you don’t incentivise investors through tax exemptions, how else do you encourage investments in equity?

Given the twin objectives of achieving high growth and maintaining fiscal discipline, it was difficult for the government to continue exempting LTCG on listed stocks. The government has made ease of doing business in India its priority and has reduced corporate tax rates in a phased manner. The government seems to be incentivising Indian equities by making investments to achieve structural changes in the economy to facilitate business and enable businesses to earn high returns.

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