Revenue uncertainty due to Goods and Services Tax (GST) will mean that a significant part of the Budget-making process will be guesswork , Pronab Sen , c ountry director, IGC’s India Central Programme and Former Chief Statistician of India, said in an interview. He added he would be okay with a 0.5% slippage in fiscal deficit target, if it was due to higher expenditure to compensate for demonetisation and GST effects. Excerpts:
How much of the rebound in manufacturing can be attributed to GST re-stocking given that the IIP for those months fared pretty poorly?
Quite a bit, I’ll say. If I assume that between Q1 and Q2, you had people who drew their inventories down to a low level, and then replenished it in Q2, then what I get is an average manufacturing growth rate of 4.5%, which is roughly what the IIP would suggest. So, I think, a lot of it is that. But I think the interesting thing is that I had expected an additional negative effect in Q2 because of the disruptions caused by GST itself.
How would you reconcile this disruption — which did take place, according to data as well as anecdotally — and the fact that the GDP data showed manufacturing grew at 7%?
As I said, re-stocking is definitely a factor. What I wasn’t able to see as I haven’t gone through the press note in detail, is what has been the growth in inventory. Because, what may well happen is that you produce both for restocking as well as for sale, and the sales haven’t happened because of the disruptions. The other thing to keep in mind is that most of what you are capturing in manufacturing now is corporate manufacturing. They may not have been disrupted that badly by GST. The disruptions would have come in the SMEs, who won’t be measured by these indicators. I would say about half of the growth in manufacturing could be explained by re-stocking.
While converting GVA to GDP, there is the addition of net indirect taxes. Since quantifying GST collections at the moment is difficult, can we expect a larger than normal revision in the GDP growth rate?
I don’t know what they have done this time. The difference between GDP and GVA is not that large, about 0.2 percentage points. That’s not particularly large and is reasonable. The question is, what is the accounting they have done? This would suggest they have already taken into account the input tax credit (ITC) but we do know from industry that a very large amount of ITC has not actually been paid out. They are still waiting for the invoice matching to be done. The gorilla in the room is the ITC. Unless those go out, you don’t have clarity on your collection numbers.
What effect will this revenue uncertainty have on the Budget-making process?
It’s going to be huge. What has ended up happening is that now that we have advanced the Budget-making date to actually November — by the middle of November they must start the process, so that it’s complete by the middle of December — you will have only four month’s data of GST, and even that data will not be complete. This is a problem. You don’t have complete data, you haven’t verified your ITC claims, so you really don’t know what the net effect is going to be. So, I suspect that a lot of this is going to be sheer guesswork.
Along with the GDP numbers, there was another data release, the fiscal deficit number as of October. With the fiscal deficit touching 96% of its full-year target with five months left in the financial year, what is the likelihood of the government exceeding its target?
There is a good chance that they will exceed the target. But the fact of the matter is that there are two things that have happened. First, importantly, the Budget date got advanced. When this happens, it has a disproportionate effect on the expenditure side. On the revenue side, there is practically no effect. The advance tax payment system all go by the same calendar that was followed the previous year. But expenditure got front-loaded by two months.
As you smoothen your expenditure over a larger number of months, and the revenue data will only start coming in later, I suspect the December advance tax payments to again bounce up, so then the fiscal deficit will come down and then again go up when the Ministries start spending whatever residual balances they have.
Is it such a bad thing if there is some slippage by the end of the year and we miss the target?
Absolutely not. It is a completely stupid way of looking at it. Today, you have a situation where the fiscal deficit is crowding out nothing. Demand for bank credit is down. It’s when you find that the government borrowing starts pushing out credit, then you have a problem. But there is absolutely no evidence that that is happening.
What then would be a comfortable level of slippage you would be okay with?
It’s not the amount of slippage that matters, it is the nature of the slippage. Suppose I have a situation where the slippage is because the revenues haven’t come up to the mark, whether because of GST or because of a reduction in the excise duty on petroleum products, or because they have been unable to complete their disinvestment programme. Now, such a slippage on the revenue side actually increases the amount of money that is with the private sector to do what it wants to.
If the slippage is coming due to excess expenditure, then that’s a problem if and only if, the type of expenditure you have incurred doesn’t have the effect of boosting the informal sector, which is where the demonetisation and GST problem exists. If you are compensating for that problem by increasing public expenditure of that particular kind, like rural roads, low-cost housing, minor irrigation, then it’s not a problem. I would be quite happy if we slipped by 0.5% of GDP due to that.
But if I am getting an increase in expenditure due to bullet trains, then I would have a problem.
