Focus on fiscal deficit can kick in a virtuous cycle: Ajit Ranade, Aditya Birla Group

Gayatri Nayak
The Economic Times
03 March 2016

The government's commitment to fiscal consolidation has the potential to start a virtuous cycle, prompting a rate cut which can boost investments, demand and dollar inflows, says Ajit Ranade, of the Aditya Birla Group. Ranade, who is group chief economist of the company, shared his assessment of the Union Budget proposals in an interaction with ET's Gayatri Nayak. Edited excerpts:

The government has chosen to stick with it fiscal commitment. What will be its impact?
There is a potential virtuous cycle that can kick in. You have a fiscal deficit signal given — a commitment to fiscal deficit of 3.5%, which enables the RBI to cut rates aggressively. This would enthuse foreign and domestic investors, potentially resulting in more dollar inflows, which can help stabilise, if not strengthen the Indian currency, and possibly also ensure moderation of inflation and further rate cuts.

The proposal to tax 60% of employees' provident fund (EPF) will hurt the salaried middle class the most. What's you assessment?
At a time when the government is asking RBI to reduce rates, it is strange that the EPFO board is hiking rates. The economic survey pointed out that there is an interest rate subsidy on PPF scheme and top three percentile of the income earners are supposed to be beneficiaries of this interest rate subsidy. I am sure it is the same story for EPFalso. EPF is only for organised sector workers. I am sure the tax treatment of 60% of withdrawal from EPF is going to cause disquiet among the middleclass. But we need to be rational. We cannot have benefits skewed in favour of one class. The government is also trying to nudge people away from PF to NPS.

Do you think the tax structure is regressive, depending more on indirect taxes?
Not only is our tax to GDP ratio the lowest (among comparable economies), but also the direct tax to GDP ratio is among the lowest. When we are trying to signal a change in tax stance, we should increase the share of direct taxes and lower the share of indirect taxes, which is a progress we have done since the nineties. The share has come down from 90% to over 60% over the period. The fact is that next year's tax projection shows zero growth in direct tax. It is not aiding progressivity. But the budget introduced dividend taxes, which is a small step towards progressivity (in taxation policy).