FY 2019-20 Q1 GDP growth rate of 5%, a three-year stagnancy in FMCG consumption and announcements of assembly line shutdowns in leading automobile manufacturing facilities across the country led the stock markets to rally to a staggering 36,500 level at the BSE and breach the 11,000 mark at the NSE on September 19, forcing the ministry of Finance to step in with a slew of concessions, announced subsequent to the meeting of the GST Council the following day. In line with the turnaround strategy (of keeping GDP on track by shifting focus from consumption expenditure to investment expenditure) suggested by the previous Chief Economic Advisor, Mr. Arvind Subramanian at the time of release of the Economic Survey of 2019, the RBI has cut the repo rate by 110 basis points, from 6.5% to 5.4%, since January, with the expectation that commercial banks shall reduce lending rates to make finance available at more attractive rates to retail and corporate borrowers. The Finance Minister, on Friday, supplemented the efforts of the RBI by bringing down corporate tax rates to 22% to a level comparable to the rest of Asia, and 17% for new manufacturing units, and postponing the levy of surcharge on capital market transactions, thereby, providing a much needed booster to corporate investment and capital market sentiment.
While these measures are welcomed by an economy hit hard by structural changes initiated by Modi 1.0 since 2015, its impact on the fiscal deficit of the country mustn’t go unnoticed. Ms. Sitharaman announced that the fiscal deficit estimate would be revised upwards to 4% for FY19-20 against 3.49% reported last year. On the income side, H1 advance tax collections rose by 6% (against 18% last FY), which means that the collection must rise by 27% in H2 if the government is to meet its revenue target. Similarly, GST collections rose by 4.5% in Aug'19 but dropped below the INR 1 lakh crore mark. The reduction in corporate tax rates (which contribute 95% to the direct tax collection in India) may not be able to provide the requisite boost to collection if sales do not pick up. New manufacturing units set up on or after October 1, 2019 may also be unable to add to the revenue collection of the current year, given gestation periods. The same is true for new capital investment made by existing corporates in the coming months.
From a consumption point of view, there is only so much toothpaste that a person can use. FMCG seems to have platformed for the time being, and it is unlikely that the industry will expand beyond 4-5% this fiscal. Auto will continue to be impacted, given the ushering of Bharat Stage IV norms, stricter road and environment safety regulations and 'changing spending patterns of millennials'. While it is cheaper to borrow and spend now than a year back (commercial banks like SBI and HDFC have slashed lending rates), the retail consumer has few low interest credit instruments at his disposal. Burgeoning credit card interest rates, tax disincentives on informal sector loans and the new individual credit rating schema result in the rationalization of retail spends. Coupled with recent layoffs, collective purchasing power is down.
The following may facilitate reigning in of the fiscal deficit: (i) increase indirect taxes on goods with low elasticity of demand and penalties on activities with negative externalities; (ii) align levy with millennial spending habits; (iii) withdraw benefits to sunset industries; (iv) encourage citizens to avail of public services, such as visit government run tourist sites. By penalizing actions which are a social menace or undesirable (like rash driving, polluting industries), non-economic objectives like improving the environment, livability and law enforcement can be achieved. Not only will this have positive implications for public finance, it will also set in motion desirable behavioural change.