Union Budget 2018: ‘A Finance Man Should Always Be Conservative In Estimating Revenue,’ Says Hasmukh Adhia
The Union Budget 2018 has roiled both bond and equity markets with the 10-year government bond yield spiking and key equity indices witnessing their biggest fall since the demonetisation announcement in November 2016.
While the equity markets are likely reacting to the reintroduction of long term capital gains tax on listed shares, the bond markets have been fretting over delayed fiscal consolidation and a lack of demand.
Finance Secretary Hasmukh Adhia believes the market reactions were inevitable as well as anticipated by the government.
In an interview with BloombergQuint’s Menaka Doshi, Adhia agreed with a few expert views that his government’s revenue estimates were conservative and expenditure estimates were realistic, not low.
Today equities fell the most since demonetisation.
It is because of that one provision that the market was expected to react to. We had expected some amount of correction in the market because of extra tax of 10 percent that we have put on long term capital gains.
What about the bond market reaction?
Bond rates are hardening because of liquidity. There is some sort of lack of liquidity in market which is one reason. It is also because of announcement of extra fiscal borrowing which we have done, 0.3 percent, in yesterday’s budget. Some amount of hardening of bond rate was expected.
Do you not believe that this government moves are counterproductive to your own efforts to keep interest rates and inflation lower?
There are certain things which we cannot help. If we have to bite the bullets, then we have to do it. Instead of fudging the figures, we have frankly told markets that we are exceeding fiscal deficit target by 0.3 percent this year and for next year we are giving a target of 3.3 percent. So, that’s what we have to do.
One market expert described this as a budget attempting to keep inflation under control. Another was uncertain about your revenue and expenditure targets. How would describe the the central theme of this budget?
The central theme is to provide for funds that are necessary for rural rejuvenation and not be a miser in that. We have made some provisions for rural sector, agriculture, social security and for health and education. Now, we have to provide for these important sectors.
According to me, the estimates of expenditure are very realistic. There is no under estimation. When it comes to revenue, I agree with tax experts, that we can expect much better tax buoyancy next year as tax compliance under GST will go up. It is also because of the effect of demonetisation as tax notices were sent to those who deposited their money during that period. These will be assessed for penalty and then sent for appeal.
So, the recovery for those extra taxes will continue for next 2-3 years. We can expect much better direct tax growth rate and the indirect tax growth rate next year.
Are you anticipating hurdles in rolling out GST? Is that was has led you to be more conservative?
A finance man should always be conservative in estimating revenue, but one should be very realistic in expecting the expenditure. That’s exactly what we have done. Our estimate is that GST compliance is going up and we will get much better revenue. But we have to be erring on side of caution when it comes to revenue. That’s why we have put a reasonable estimate rather than buoyant estimate. But we do hope that it will be much better than this.
By how much? Can you share what your expectation is?
There is no limit to expectation. I won’t hazard any number on this. We can’t put a number to it. Our expectation is it will be much better.
My expectation will be so high that if I put a number before you, then you will not even believe it.
No Tax Cut For Big Business?
Have you ruled out a corporate tax rate cut for large businesses, from 30 percent to 25 percent?
We don’t want to hazard a guess for future. We can never predict the future and we can talk only about what we have announced in the budget so far.
Will you consider doing away with securities transaction tax now that long-term capital gains tax is back?
We have already said that STT will stay till such time as the capital gain regime for equity market remains subsidised. It is already an easy regime for them compared to all other classes of investment.
As long we have 15 percent short term capital gains instead of 30 percent, 10 percent long term capital gains instead of 20 percent and a one year period for long term capital gains instead of two years which is in case of other assets, this STT will continue.
Watch the full interview here.