Government Needs To Relook At Fiscal Deficit Goalpost, Says CII President
CII pitched for front-loading of government expenditure on infrastructure rural projects to revive consumer sentiment.
The government should relax the fiscal deficit target to help revive growth, according to Vikram Kirloskar, president at Confederation of Indian Industry. There are no green shoots visible he said describing the business environment, and added that its not clear if the economy has bottomed out yet.
“Can’t expect the private sector to spend more at the stage when capacity availability in the market is quite large. No one will invest unless capacities get filled up,” Kirloskar told BloombergQuint in an interview. “So, I think this is the time where government can spend more on infrastructure and if we let go of the budget deficit for a year or two before we start pulling it down again.”
There are issues with the economy and there are issues with how to get out of it. One of the ways we feel is we have to spend our way out of it and that’s what we are suggesting to the government right now.Vikram Kirloskar, President, Confederation of Indian Industry
This comes at a time some states, during pre-budget consultations, suggested Finance Minister Nirmala Sitharaman go for fiscal expansion and relax the deficit target to 4 percent of the gross domestic product. The finance minister in her maiden budget in July had lowered the fiscal deficit target for 2019-20 to 3.3 percent from 3.4 percent. The government, too, has stuck with its borrowing plan announced in the budget even as corporate tax cuts are estimated to cost the exchequer Rs 1.45 lakh crore.
Need To Spend
While a GST rate cut would help boost consumption, CII believes it’s an unrealistic ask in the face of falling tax revenue. “If you say reduce GST, certainly the states are not going to agree for it,” Kirloskar said, adding that a rationalisation of rates into few slabs and effort to expand the tax base as well as compliance would work better.
The industry body also pitched for front-loading of planned expenditure of the government on rural projects rather than spreading it over the year to revive consumer sentiment.
“Trying to create demand and getting people to spend money is very difficult. For that, it is not the just the money you need; you need confidence that my future growth and salaries are good. It is not as simple as building a new factory,” Kirloskar said. “We want to support the government as we are both facing headwinds together and one of the ways we are suggesting is spending our way out of it.”
Watch| CII President Vikram Kirloskar on the economy, over-regulation, RCEP trade agreement and more.
Here are the edited excerpts of the interview...
I am going to start first by asking you for your assessment of the state of the economy... whether you think we are anyway close to bottoming out given the recent data that we see and are you witnessing green shoots in any sectors across the economy?
I think the industry is definitely facing more headwinds. The whole economy is facing headwinds. Among industries, there are some industries that are facing more headwinds than others and some which are doing better than the others. When you talk about green shoots, I am not really sure. I saw that in today’s papers, I don’t know who wrote about the green shoots, but I would certainly like to ask the person who wrote about it what did he see. Whether we have bottomed out, I think it’s hard to say but it has been a long stretch of depressed revenue and depressed demand.
In your assessment, at this point in time, when will there be any comeback in either consumption or even the investment cycle?
I think there will be a comeback. But it may not be a comeback in the next two or three months. Like I was telling someone, it is easy to make a five-year plan right now but making a three-month plan or a six-month plan is very difficult. We have asked from CII, we have been talking with the government and we have put a whole lot of suggestions but the major ones which we talked about with the finance minister in her consultation meeting yesterday was you please think of relooking at the goalpost for budget deficit. Look at expansion in your policy and perhaps start the government to start spending more.
Can’t expect the private sector to spend more at the stage when capacity availability in the market is quite large. No one will invest unless capacities get filled up. So, I think this is the time where government can spend more on infrastructure and we let go of the budget deficit for a year or two before we start pulling it down again.
The corollary to that is, any such relaxation the fiscal deficit will have a negative impact on businesses like yours due to higher borrowing costs. We have seen lending rates continue to remain high, the transmission of the RBI rate cuts hasn’t happened completely yet when it comes to corporate borrowing. So, how will that square?
There is going to be some effect definitely on inflation and on interest rates. I think interest rates and not all of it has been fully passed on. So perhaps, not all of rise will also get fully passed on. Even in the past we have had higher interest rates and high inflation and then we have had been significantly higher growth. I think, it is something we will have to go through.
Right now what is the other solution? What is your alternative to say, let’s increase demand? Let’s spur up demand, let’s spur up sentiment. We need to figure out how to get some money back in the economy, encourage people to spend more to get this thing going. Somewhere we will have to take a hard decision like this.
The decision to cut tax rates while in itself is a good decision, was maybe the wrong solution at this point of the problem? Instead that give away on tax revenue should have come maybe through consumption-oriented schemes - for instance maybe a lower goods and services tax rate? That would have a more immediate short- to medium-term impact versus a lower corporate tax rate which is definitely a good move but a more longer term impact?
Corporate tax move is definitely a longer-term impact. I think there were a lot of projects where India was competing against Southeast Asia, probably for many companies. I know for a fact, where India was out of the game and this certainly brought India back to the table as a location for further investment. I think you will see the results of the corporate tax deduction in the next 12-18 months.
Also, with stress on the economy and people’s profits coming down, I think it’s helping people a little bit to maintain their profits. I think the corporate tax was at the right time. It showed that the government was willing to listen and move ahead.
I think in a given year, asking for both—a corporate tax cut giveaway and any other sort of stimulus measure might be asking the government for a bit much...
We are not asking for any other tax cut. We have not asked for personal taxes right now. So, in my statements I have said that there are other more important issues, first look at how to increase demand. What are the ways we can do to increase demand, to improve liquidity in the system. The only other tax area we talked about is, look at how to make equity as a more competitive instrument compared to debt.
So, look at the entire taxation on equity whether its capital gains, dividend tax, or fees in between, in transactional taxes. Have a look at that whole thing, we haven’t made a single number suggestion, but we have only suggested that they look at the whole gamut of taxation around equity to make it more attractive.
Is it not the industry’s contention that may be a lower GST rates might be actually more helpful than lets say, a stimulus push in infrastructure which might take much longer lag effect to benefit the economy? Have you weighed the consequences of those two?
You have to be a little bit realistic to the whole situation as well. If you say reduce GST, certainly the states are not going to agree for it. I think everyone is trying to see how to increase the GST collection if you look at the situation today on GST collection.
We feel regarding GST that it’s better to rationalise the rates, get more people in the GST net, use technology, use data analysis, try to broaden the GST net by flattening the rates or making less variety of rates. Make the whole system simpler rather than reduce GST. No state is going to agree to it.
Is the government moving fast enough? Do you believe that the time lag effect of some of the measures it has announced, such as the real estate rescue fund, is drawing out the slowdown and creating more pain?
The kind of system we have, with our checks and balances, I think they have been going fast. It can’t be like the private company where the CEO decides something and then next day something happens. I think, there is a process that Government of India have to go through, and they are doing it as fast as reasonably possible.
One can argue that you need more to be done, less to be done, its difficult. Tell me, we have been talking with many economists who understand economy better than I do and everyone has a slightly different opinion. The government also has to have a consultative process to come to a decision and I think they are trying very hard to do it. We want to support the government as we both are facing headwinds together.
Of course, we have issues with non-banking financial services, liquidity, payments, there are many other issues also going but the thing is how do you push demand. GST reduction is on one side—reducing the cost and the other is money in the hand which is being spent for various projects which will take a longer time. But we just felt that asking for a GST reduction was the obvious thing but it will take a longer time before that happens.
There are issues with the economy and there are issues with how to get out of it. One of the ways we feel is we have to spend our way out of it and that’s what we are suggesting to the government right now.Vikram Kirloskar, President, Confederation of Indian Industry
What was the government’s response to your request? Do they seem inclined to consider relaxation on the fiscal deficit side and therefore as you point out ‘spend your way’ out of these crisis?
Let me say that in our meeting yesterday which was with associations, I was in meeting with various other associations. I would say they paid a lot of attention to what I said, to what other associations said. They listened to everyone very carefully and I don’t think anything was said that we can’t do this, or we can do this. They did not give any comment but they did listen carefully and they asked questions regarding our views. They also realised that we are facing headwinds together, they know that. I think, they are also looking for a solution. It’s not an easy solution to find. You could make a big long-term mistake in taking a decision which we may suggest we don’t know.
They did a right approach by consulting everyone. We have seen the ministry react in the last few months on various issues that have come up fairly fast. So, we are hopeful that they will continue to listen to us and they showed that intend and come up with something positive.
How confident are you that additional spend on infrastructure can be implemented in any substantive or efficient fashion? Recently infact, the Prime Minister’s Office suggested that National Highways Authority of India should take up fewer new projects and focus on monetising completed projects.
It’s very easy build up the supply side to build up capacity. It’s a matter of investing in a factory and building it up but trying to create demand and getting people to spend money to buy something is very difficult. For that you need, it’s just not money, you need sentiments, confidence that my future growth is good, that my future salaries are going to be good. It’s a whole lot of things, it is not as simple as building a new factory.
This is one of the suggestion that we have made. We have said relook at the goalpost on the budget deficit and perhaps extend them and be little more flexible in infrastructure spending; we have also said any other programme, especially in rural sector, please front-end them rather than spread them over the year. How fast they will work, how fast is it possible that they will be done, immediately, two-three months, it is difficult to say.
Just before India’s critical meeting for the regional trade treaty of Regional Comprehensive Economic Partnership, you issued a note explicitly supporting India’s participation. Were you disappointed that India did not in fact participate as fully as you had expected?
We are in favour of free trade agreements, provided all of the Indian issues are well protected, therefore services have to be fully included, that’s the part of the industry in India. No non-trade, non-tariff barriers should be there as well as rules of origin are clear. I think, in RCEP these three items were not clear and they were not of any advantage, rather they were of any disadvantage to India.
So, I think, the government took an appropriate decision in not signing the RCEP, but I still believe they should pursue it and make sure to get what are we required in RCEP. Same thing any FTA with Europe or any FTA with the U.S., try to do it but protect India’s interest and then do it. We should not be at a disadvantage. The markets of China, U.S. or Europe are huge. We need them, we need to access them and we need to sell there but it has to be at an equal footing as well. They can’t be non-tariff barriers, and rules of origin have to be very clear in any kind of treaty like this. There were issues on these points and therefore, the RCEP was not signed.
Yes, I was slightly disappointed that the RCEP was not signed, I would prefer something like the RCEP in long run, but I am happy that the government was firm on all these specific items which they objected to and therefore, did not sign it.