Very high fuel prices on consecutive days of price hike has a lot of people worried. We at ET Now support the move to decontrol pricing and we do not believe that any part of the government or OMCs need to cushion the consumer. Do you agree that perhaps there is a need to review the excise duty on petroleum? A minister did say there will be a solution soon, but that was vague. Is there a case to cut excise duty?
I am glad to hear the minister saying that there will be a solution soon and that will be directed toward bringing some relief to the consumer. But as an economist, I have to look at whether we have the fiscal space in our revenues at the moment to accommodate that. If there is no fiscal space, then excise duty cut will deteriorate our fiscal deficit and then that has its own multiple impact going forward.
The good news here is that we have shifted from the accrual to the cash accounting system and in 2018-2019, we will collect GST revenues of 30 months as we did for only 11 months in 2017-2018. That should bring to the central kitty about Rs 50,000-55,000 crore as its share. because if April figures you have to go by, we got Rs 1 lakh crore of GST collection and this will only improve as we go forward, as more and more businesses get registered under GST.
So, while recognising that an excise duty cut of Re 1 leads to about Rs 12000 crore or so of revenue loss, there is this extra space that we can use. The other thing is of course that we have to act more aggressively on creating some fiscal space by further disinvestment or selling off or monetising our highway or airport assets and generating some revenues there.
That is extremely important and should be music to the ears of a lot of consumers out there. But there are a lot of naysayers out there who believe that given that GST collections have been fluctuating, the reality is that consumers were not the sole beneficiaries when prices did go down substantially to about $30 a barrel. That money was used to meet fiscal targets, for infrastructure and why should they not be given some sort of a respite now? but I am glad to hear that you believe there is fiscal space. But with fluctuating revenues, how tough is this going to be?
You are right because bringing the petroleum products under the GST will have zero impact on tax collection because the same taxes would be collected except that our exporters will get the benefit of the input credit that they have which is a tax they have paid on the energy supply. So, not just petroleum but also power should come under the GST simply to make our businesses globally competitive.
Now this unfortunately will not impact the final consumer also because he or she does not get any input credit. When you and I consume petroleum products with electricity, that is a separate argument and there is a complete consensus within the centre on doing this. It is the states which are dragging their feet because a lot of them are dependent on petroleum revenues and also some of the duties that they charge in electricity for revenue as revenue sources.
But state revenues are rising because of the buoyancy GST as well as buoyancy in direct taxes. This is the time to bring oil under the GST as soon as possible because otherwise the businesses located all over the country will stand to lose because of loss of competitiveness. I had heard the finance minister say very clearly that the centre would quite like the energy related products to be brought under GST as soon as possible.
Thanks to the rising crude prices, the macro picture is not as strong as before. The rupee has depreciated close to 6%. This year economists expect the current account deficit to cross the 2.5% mark of GDP. How worried are you?
On rupee depreciation, I am not worried at all In fact, I have been one of those who have believed that the rupee had been overvalued in real effective exchange rate terms by about 12%. Therefore, I am not worried on the rupee fall. In fact, this will be a good signal, giving good impetus to our exports which need a lot of picking up even now.
On the inflation bit, the headline consumer inflation is still at about 4.13% or 4.23% which is the midpoint between 2 and 6. I would assume that the RBI would not take that as a danger sign or something to get hyper active about. Finally on current account deficit, 2.5% of GDP is getting worrisome but thankfully we have enough portfolio flows and capital inflows to continue to build our reserves which are now quite healthy.So, this is not a where the external account is getting completely out of kilter.
The key, however, must be to promote and expand and accelerate the export both of goods and services as also to encourage tourism in our country. That is something that we need to focus on. There are nitty-gritty measures that we need to get into — whether it is logistics or infrastructure or access to commercial credit for small and medium enterprises or to make sure that all the pain that had come by the way of the twin movements of the demonetisation and GST on our exporters is removed as soon as possible.
I refer here to the reimbursement on the exporters for all the taxes they have paid. We must focus very quickly on our external sector receipts because that is the way forward and not any sort of drastic measure on one of the macroeconomic parameters which would only bring further hurt to the economy.
Given the hawkish tone of MPC and the rising crude oil prices that we are seeing now, the Street seems to be betting on a rate hike soon. Some believe it could happen as early as June itself. Is there enough ground for rates to go up? What sort of impact will a rate hike have on the recovery process that seems to be underway?
Given where the bond prices are, now the transmission would be much quicker than what it has been in the past. A rate hike at this point of time would convert itself very quickly into higher lending rates. I believe the liquidity is no longer flushed and we are getting into a tight liquidity situation. So, any rate hike at this time by the RBI would be transmitted quickly throughout the system. That will of course hurt the recovery because the banks’ major expansion has been on retail lending which is the housing loans and loans for capital goods, and autos. With rate hikes, EMIs will go up right away and that will curb the incipient recovery that we are beginning to see in the housing sector.
RBI should look at its inflationary expectations surveys rather carefully. I know that the core inflation minus fuel and food is not looking so good, but I am hoping that the RBI would look at the inflationary expectations and probably find that there is no reason to believe that inflationary expectations are getting entrenched. This is anyway not the right time to hike rates because the food prices will come down as we approach the monsoon and this is a very transitory phase.
I am also hoping that with now oil going above $70-75, there must be a bigger shale oil response from the US and which will in some sense moderate this Saudi Arabia-Russia deal of keeping prices where they are. This should therefore not become a new benchmark Given that the fuel and food prices are both not permanent there, I would hope that RBI will take a very considered view before hiking the rates.
Coming to the fiscal deficit target of 3.3%, you perhaps laid the ground for it by saying that there is an additional elbow space for the government without disturbing the fisc by cutting excise duties. The MSP hikes will start pinching and at some point, the government perhaps will have to give some relief. Are you confident that by giving the relief, the fisc will be under pressure?
In my view, there is enough fiscal space already and there is room for much more pointed and focussed action on improving the non-tax revenues on part of the government. That should be done now and there are proposals for it already. There is no reason for the government not to liquidate the SUUTI holding at this point of time.
So, I am merely saying if you want to bring relief to the consumers, you have to make the fiscal adjustment for it but luckily for us there is fiscal space available. Also, some of our actions can generate additional revenues which will leave the fiscal target intact and cause no slippage whatsoever. Please remember that we are having some unprecedented buoyancy in tax collections, both on the direct and indirect tax side. We should in some sense factor that in at this point of time when designing the package that the petroleum minister hinted at.
Structurally, is the economy in a better place than it was a year ago? Is the next one year going to be a tug of war year between the good micro and the tough macro?
Yes. Well put. But the good micro is the one to really go for and look after and also to reinforce and strengthen. At the end of the day, it is the real economy and the supply side response which will bring us joy and benefit. The macros in some sense will take care of themselves if we make sure that our supply side response is robust, if we make our medium and small enterprises much more dynamic, if we can improve our affordable housing allocations and programmes so that we can generate those multiplier effects and if we can modernise and improve our agriculture productivity. It is the micro aspects which need care and nurturing at this point in time.
The first of the dirty dozen case in IBC has been resolved. Can the one lakh crore figure be resolved by IBC as the deadline looms large because the Tata-Bhushan perhaps is the first test case and it has been a sweet experience after all?
I am thrilled to see this whole insolvency and bankruptcy code now finally in action. This is a historical change. It was never done before and I am quite confident that the one lakh crore target will be met. People are now going to get much more faith in the process and are also learning all the time what to do and how best to go about it. IBC has done very well and the commission has done very well under Sahu. We will see much better results and much more joy going forward.
Source: Economic Times, May 22, 2018