“We are pretty hopeful that we can get to around 4% of GDP on income taxes,” he noted.
Speaking with CNBC-TV18 as part of a Budget countdown discussion ahead of the Union Budget 2024-25, scheduled for February 1, Sengupta explained, “Consumption is not a homogenous slowdown. Urban mass is slowing down, partly due to macroprudential tightening by the RBI on consumer loans, but the higher-income segment, which contributes more to income taxes, continues to see job and income growth.”
He also pointed to services exports as a key driver of this segment’s economic resilience.
He expects slowdown in corporate taxes given the cyclical slowdown in the economy and lower earnings growth possibly going into next year.
Pranjul Bhandari, Chief India Economist at HSBC, who joined the discussion with Sengupta, expects the government to remain committed to its fiscal consolidation path, reducing the deficit from 4.8% to 4.4%.
Despite slowing growth, India currently enjoys macroeconomic stability, with low inflation, a stable current account deficit, and a declining fiscal deficit. Bhandari emphasised the importance of maintaining this stability, cautioning against actions that could jeopardise it, as the cost would be significant.
Sengupta projects gross domestic product (GDP) growth at 6.1% for the current fiscal year and 6.3% for the next, with nominal GDP growth at 10% in 2025-26 (FY26).
These are the edited excerpts of the interview.
Q: Your real and your nominal GDP assumptions, and whether lately, you have brought them up or down?
Sengupta: We have been almost at the bottom of consensus for a while now on growth. We are at 6.1% GDP growth for the current fiscal year. We are looking at 6.3% for the next fiscal year.
Nominal GDP growth in the handle of around 10% may be a shade higher going into 2025-26 (FY26). It will be slightly lower in 2024-25 (FY25). That is sort of the broad assumption. I think the bigger picture is that India is amid a cyclical slowdown, mainly policy-driven in our view, and we can discuss if there is any policy room to stimulate the economy at all.
Q: What is your third quarter assumption in that case?
Sengupta: We are at 5.9% for the third quarter. Tracking estimates are pointing slightly higher, but there is an amount of liquidity tightness that is going on in the system right now, and therefore we are not super hopeful about the recovery, at least in the first half. The second half is possible going into this year.
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Q: What are you assuming for this year next?
Bhandari: For 2025-26, we are assuming a 6.5% real GDP, but for the remaining two quarters of 2024-25, we will probably stay in the 6-6.2% handle.
Q: 2025-26, you are expecting only 6.3%. It’s not a big jump despite what should be a good base. Would you expect this budget to recognise that slowness and go in for more revenue expenditure rather than capital, more subsidies or transfers, will that be a policy thrust at all?
Sengupta: There will be recognition of the slowdown in certain pockets of the economy. We don’t think this is a broad-based slowdown. Even if you look at consumption, there is an urban mass which is dragging the top end, what we are calling as affluent India, is still driving growth. It is pretty good.
We think that the rural economy is recovering at the margin in line with what you are saying. There are some fiscal transfers which are already happening at the sub-national or the state government level. You are seeing that welfare payments, transfer payments, and subsidies have increased to the point of 0.5-0.6% of GDP over the last couple of years.
Even if there’s recognition, our bigger point is that you might want to shift around expenditure a little bit from CapEx towards welfare or transfers, but the net fiscal impulse on the economy is still going to be negative, or there is going to be a fiscal drag if you are going to consolidate the deficit. And I don’t think there is any question, at least in our mind, of whether the government will be consolidating or not. There is no question of expanding deficits at this stage of the cycle.
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Q: A 4.7-4.8% is not at all on the cards, according to you?
Sengupta: Even if it is 4.7% for instance, from 4.9% of GDP this year, you are still going to have a fiscal drag because you are consolidating the deficit. So unless you go towards like 5% of GDP, the net impulse on the economy is negative. Now within that, we can think about the mix, and whether you want to shave a little bit from capex, you want to allocate more towards welfare or transfer payments or subsidies, but overall to manoeuvre is relatively less.
Q: You are also going with a 4.5% fiscal deficit, like many economists. Will the capex theme that has dominated the budget for the last four years fall to 2.9-3% of the GDP and switch to stronger income transfers.
Bhandari: I do think that the government should and will stick to the fiscal consolidation path, bringing down the deficit from 4.8% to 4.4% and it is very important. Growth is slowing, but what India has right now is macro stability – inflation is low, the current account deficit is stable, and the fiscal deficit is on its way down. Let us not mess that up. The cost of that would be very high.
But within the space that you have, which is limited space, how can you best give money for growth? My sense is what the government has done well in the last couple of years has been capex, and they should not change that at this point in time.
States are giving a lot of current expenditure, and a lot of cash transfers, let states run with that. The central government should stick to capex.
Q. Shantanu, you’re expecting the income tax to rise to 4.1% from 3.9% of the GDP, which is the revised estimate for the current year, which means you’re expecting income tax to continue to grow. But with urban consumption and other signs of slowdown, are you still enthused to assume such a strong tax growth?
Sengupta: Consumption is not a homogenous slowdown. In our view, it has been very heterogeneous. You’re having the urban mass slowing down. Some of it is driven by the macro prudential tightening, by the RBI on consumer loans. That section’s contribution to income taxes is relatively lower. The higher income earners are contributing more to income taxes, and that is the section of the population which is still delivering in terms of job growth as well as income growth. Services exports is one number you should look at to understand the kind of growth in that segment of the population. Therefore, we are hopeful that we can get to around 4% of GDP on income taxes, whereas our assumption on corporate taxes is lower given the cyclical slowdown in the economy and lower earnings growth possibly going into next year.
For the full interview, watch the accompanying video
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