The Economic Survey for 2014-15 has painted an optimistic picture pegging the FY16 GDP growth at 8.1-8.5 percent. Will the push towards generating revenue result in reforms in the direct tax system and what will the Budget entail for boosting public investment & private consumption? MS Unnikrishnan, MD of Thermax, Indranil Pan, Chief Economist at Kotak Mahindra Bank and Pranav Sayta, Tax Partner at EY, discuss on the same.
Below is the transcript of MS Unnikrishnan, Indranil Pan and Pranav Sayta interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.
Menaka: There seems to be a clear indication in the Economic Survey that the government is going to look towards boosting public expenditure in an effort to revive public investment that is in an effort to revive private investment and this will be predominantly in the area of railways as we heard yesterday but also otherwise. What did you take away from that and therefore does this heighten your expectations for big announcements tomorrow?
Unnikrishnan: First of all it is a welcome indicator from the government that they are going to be taking very definitive actions towards the revival of the investment cycle. However I may have some differences with the numbers they talk about. Because the resetting of the way the Gross Domestic Product (GDP) growth is calculated is one of the reasons why these larger numbers are visible because they are talking about the current year GDP growth rearing to 7.4 percent and next year we are targeting for an eight percent. But is it really achievable is something which we need to be looking before we come into a conclusion as to what all will be the investment to be done for.
Allocation of maybe railway investment rising from Rs 60,000 crore to Rs 100,000 crore for next year is certainly not going to give a GDP growth of eight percent. So, let us have the clarity over there. But certainly I am sure there must be many of things which are going to be announced tomorrow. It is welcome move that if we are able to grow our GDP back to eight percent.
Take a point over here for a stock that we grew as an economy at the rate of eight percent somewhere in 2004-05 and the ground level movement in the industry or in the service sector or in the agricultural sector, is it incumbent or equivalent to a growth of an eight percent. My answer is no.
Menaka: Are you convinced by that 8 percent growth expectation for FY16, 8.1-8.5 percent to be specific given where industry is right now?
Pan: It probably would not be right to compare the 2003-2007 in terms of the number on the growth that we got. The whole methodology has changed and we have totally shifted. It is not just a change in the base but we have totally shifted the methodology.
Coming back to the more sort of realistic ground level realities, I do accept Unnikrishnan's belief that the momentum is still not adequate enough. However unfortunately because I do not have a back casted series on the GDP I really do not know whether the 8.1-8.5 percent for the next year that the government is talking of is below potential, at potential or above potential. So, that is something that we really need to keep in mind.
Senthil: 8.1-8.5, is there any way to calculate what it will be on the old calculation?
Pan: Absolutely impossible simply because as I said, we have a total change in methodology and it is absolutely impossible to do that and that is what we are expecting the government to come up with some indications as to what the back casted numbers are and unless they actually come out with the back casted numbers, it is very difficult to even calculate the potential growth of the economy and to that extent even the Reserve Bank of India in its last policy has clearly indicated that it is very difficult to understand the growth dynamics at this point in time.
Menaka: What would you like to see in terms of increased public investment that you think will help kick start private investment over the course of the next fiscal? If he has Rs 1 lakh crore or thereabouts to spend where would you spend that money?
Unnikrishnan: First of all Rs 1 lakh crore is little lower. In my understanding it could be a little more.
On the oil side alone it will be around USD 25 billion, which is equivalent to Rs 1,50,000 as additional plus there is additional saving in gas also is going to happen.
Railways has already announced the core sector which can make a difference for the country in terms of investment starts with power, then there is highways and roadways, ports, also supporting steel and cement industry and oil and gas industry, these are the ones which are the main core investment oriented infrastructure for the country and you don’t have to be limiting yourself to what is going to be saved in one year.
In the current Budget my expectation is government announces projects worth at least may be Rs 10,00,000 lakh crore in this area of which a part will be spent in the first year and that will be a direction for the people in the industry to look forward to where they need to be adding their capacity to meet up with the demand that is going to be arising out of this policy direction, that is my understanding on that. Once the government shows a way I am sure there will always be a follow-up done by the private industry which are also not having less quantum of money. The balance sheets of Indian private industry today, the listed entities all put together do have in excess of Rs 8 lakh crore sitting in resource and surplus which is an investible fund. With a debt-equity ratio of 1:3 you have almost equivalent to, may be Rs 24 lakh crore worth of invisibility in the next may be 2-3 years from private industry. Put together if all that can be put to practice with the government leading it, I am sure we are heading for a good growth.
7.4 percent if it is the current years number next year he is telling 8.1 percent which means the GDP real growth in comparison to last year versus the coming year will be 0.7 percent. So, if last years growth was actually 5 percent it will become 5.7 percent for our old way of calculating.
Menaka: There are two things that he said that give me to believe that there will be clear articulation in the Budget tomorrow. One was to do with improving the revenue to GDP ratio from the current 19 percent to 22-25 percent, that is the ratio that exists in comparable countries. Now, the one big boost in revenue will come from expanding the tax base. He may not announce specifics tomorrow but the Finance Minister may choose to articulate a broader vision on how he hopes to go about doing that?
Sayta: There are two or three things that we can expect. One is an attempt to increase the tax base which probably has been in discussions for quite some time now. The other is how does one improve compliance which also in its own small way will contribute to improving the revenue to GDP ratio and the third is greater efficiency in the tax administration itself and I would not be surprised if there is something on all of these in terms of policy announcements in the Budget tomorrow. One other thing that probably is expected I guess is if they are looking at a high rate Goods and Service Tax (GST) model over a period of time, then probably an increase in the service tax rate which probably might happen in the Budget tomorrow as well.
So, some of these things clearly are likely. Another mode of improving the tax base could also be removing exemptions and incentives over time though I do not see the same happening quite immediately especially given where the economy is at this stage where we need some targeted incentives to give a boost to manufacturing in Indian industry as a whole.
Menaka: Well that leads me to the second cue that I am picking from this economic survey where he says that in effort to improve manufacturing or enhance manufacturing in the country we must eliminate the negative protection that currently applies to manufacturing industries. Does that mean that we are going to see some inverted duty rate structures go away and some enhancement in some duties on imports?Sayta: That is right. So, we would see really two things here. One is in certain cases where the customs duties on imports of finished goods is probably lower than the customs duty that one anticipates paying when one imports raw materials. If the raw material is going to have greater customs duty the incentive to manufacture in India is virtually killed.Menaka: Which specific industries suffer this and therefore might see some relief tomorrow, I am told the electronics business, telecom would you like to add to that?Sayta: Absolutely electronics and telecom are the main sectors. Then there are certain FTAs that we have signed with ASEAN, in certain cases therefore even some FMCG products and chemicals get into this category especially when one is coming through some of these FTA related countries and regions. So, if that comes in then certainly one would be able to say that manufacturing in India has been at least put on a level playing field if not protected vis-à-vis competition from overseas.
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