India’s Chief Economic Advisor V Anantha Nageswaran said the country’s fiscal position remains on track, supported by a combination of non-tax revenue growth and a strong festive season. Speaking exclusively to Network18 at the Reforms Reloaded event, Nageswaran expressed cautious optimism about the economy.
“Given my cautious nature, I am more comfortable now in saying that we will be tending towards the upper end of the 6.3% to 6.8% growth range, rather than the lower end,” he said, adding that second-quarter numbers will be closely monitored before revisiting estimates.
Nageswaran highlighted the impact of recent tax reforms on households, including income tax cuts and GST benefits, which Prime Minister Narendra Modi estimated at ₹2.5 lakh crore. “The total impact on the economy can be bigger,” he noted. “With two or three rounds of multiplier effects, the economy could benefit beyond the static estimate of tax savings.”
Addressing concerns over state finances following the withdrawal of the compensation cess, Nageswaran said history shows that rate reductions have not led to revenue decline. “Volume growth will make up for the static calculation that, as rates drop, revenue will decline because volumes will increase,” he explained. He also cited rising UPI transactions, which correlate strongly with GST revenues, as a positive indicator for continued revenue growth.
On the government’s fiscal position, Nageswaran said, “We are confident that the final number will be 4.4% of GDP, which is the gross fiscal deficit. We have had good non-tax revenue growth, and overall revenue growth is on track compared to last year.” He added that the festive season extending towards Christmas and New Year is likely to provide an additional boost to economic activity.
Below is the excerpt of the interview.
Q: If you could, help us understand the stimulus provided by both the income tax cuts as well as the GST benefits. The Prime Minister gave a number of ₹2.5 lakh crore when he addressed the nation yesterday. What estimate are you working with? I’m sure that will go into the budget math as well.
Nageswaran: I think his numbers are quite appropriate taking into account both the direct and indirect taxes. Especially, focusing on the indirect tax cut under GST 2.0, it’s a combination of three components. One is the reduction in rates across many categories, for example, going from 18% to 5%, and 12% becoming 5%. That is one major chunk. The second chunk is the withdrawal of the compensation cess. These two are very positive for households. The small negative is the few categories where the rate goes from 28% to 40%. So, the final tax savings is the first two components minus the third component. That number will be upwards of ₹1 lakh crore.
Then, if you assume a marginal propensity to consume, which basically means depending on how much households consume, it leads to further income growth. With two or three rounds of multiplier effects, the total impact on the economy will be even more than ₹2.5 lakh crore. What the Prime Minister mentioned was purely the static estimate of the tax saved for households, but the impact on the economy can be bigger. Of course, we know that other uncertainties and factors may dilute some of this translation of savings into aggregate demand or GDP growth, but the total impact is of this order of magnitude when considering direct and indirect tax relief together.
Q: I want to continue with the GST conversation and talk about the impact on states and state finances. Many states expressed concern about the revenue impact they might face, and we’ve just seen the CAG numbers on state revenues. What’s your indication, considering there is no longer any compensation cess?
Nageswaran: Former RBI Governor C Rangarajan and Mr. Shanmugam, former Finance Secretary of the Tamil Nadu government, wrote an article before the GST council met about three weeks ago about how well states have done with GST. They particularly pointed out that the producing states, which were concerned about GST impacting them adversely, have ended up doing much better. That’s one point.
The second point is that the GST revenue-neutral rate, which was around 15% when GST was introduced—has been coming down even before this recent change. By last year, it was down to around 11%. Every time the effective new revenue-neutral rate or the effective GST rate came down, the annual average collection actually kept increasing. So, there is already a track record where reductions in the effective GST rate did not result in a decline in GST revenue; revenues followed a step-up function each year.
This happened even in 2019, before the election. When significant GST reliefs were announced, there was concern it would lead to a decline in revenue. But immediately after the elections, monthly numbers picked up quickly. These examples encourage us to believe that volume growth will make up for the static calculation that, as rates drop, revenue will decline because volumes will increase.
The last point is that last year, I co-authored a paper with the Joint Secretary of the GST Council. We noted that whenever UPI transactions increase, they have a high correlation with GST revenues. UPI transactions have been recording annual growth of 20–30% month on month. Rising UPI transactions are a good harbinger of GST revenues continuing to rise. With the rate cut, the volume effect will dominate. So, we shouldn’t be overly concerned—the track record shows that rate reductions have led to more formalisation, which means more revenues.
Q: That means more revenues and transactions. Hence, you believe states have little reason to be concerned at this point. Which brings me to the question about the government’s own fiscal math. As we approach the budget-making exercise, do you believe this will have any impact on the government’s fiscal numbers?
Nageswaran: I think we are confident that the final number will be 4.4% of GDP, which is the gross fiscal deficit. We have had good non-tax revenue growth, and overall revenue growth is on track compared to last year. We also expect the festive season to last until the end of the year, with Diwali spilling over towards Christmas and New Year. So, we are confident that the fiscal math will hold up very well for the current financial year.
Source from: https://www.cnbctv18.com/economy/india-gst-tax-cuts-fiscal-deficit-gdp-cea-nageswaran-19683481.htm
