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Guest Column: Monetary ‘Teasing’ and Fiscal Expansion

Private Estimates in this regard are between 0.2 - 0.4 per cent shy of the governments estimate

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Fiscal Expansion
Unexpected corporate tax cuts alongside previous measures announced over the last few days by the government amount to a total fiscal expansion of around 0.8 per cent of GDP at face value. Pixabay

The unexpected corporate tax cuts alongside previous measures announced over the last few days by the government amount to a total fiscal expansion of around 0.8 per cent of GDP at face value. That said, private estimates in this regard are between 0.2 – 0.4 per cent shy of the governments estimate.

Here are the growth, monetary policy, and bond market aspects of the move:

Growth
With this the government has shown a clear commitment to shore up growth even with its back against the wall, fiscally speaking. Further, it has resisted an easy consumption stimulus which may have had very little multiplier effects and possibly may have eventually contributed to some macro-economic imbalances. Rather, the tax cuts will help improve corporate profits and hopefully improve our global competitiveness. Further, incentives for new units announced may also help with attracting some of the global supply chains reallocations that are underway given escalating trade tensions.

This may, however, not necessarily be a substantial shot in the arm for near-term growth prospects. The tax cuts may be used in a variety of ways, including stepping up investments, reducing debt, cutting product prices, increasing salaries, buyback and dividends, among others.

All told, the immediate pass-through and growth impulses created may be not as strong and thus the tax buoyancy hoped for on the back of stronger growth may have to wait for a while. This is especially true as general competitiveness in an increasingly challenging world requires other aspects of factor input efficiencies to fall in place as well.

Fiscal Expansion
Fiscal policy for fiscal expansion has indeed chosen to step up to the plate, then monetary policy need not be as aggressive. Pixabay

Monetary policy
Prima facie, if, unlike earlier expectation of limited further space, fiscal policy has indeed chosen to step up to the plate, then monetary policy need not be as aggressive, all else being equal. That said, the global and local context is weak enough to argue for yet some (though not substantial) incremental role for monetary easing. This is especially true because RBI Governor Das doesn’t appear to be as large a fiscal hawk, currently (indeed welcoming the bold step from the government, after observing one day prior that fiscal space seemed limited).

We would hence look for monetary “teasing” incrementally, as opposed to “easing” that we were expecting before and would expect the repo rate to bottom out in the 5 to 5.25 per cent area. The one caveat to this view is of further global growth deterioration which would then open up room for further easing, whereas liquidity policy is expected to remain one of substantial surplus.

Fiscsal Expansion
Government has shown a clear commitment to shore up growth even with its back against the wall, towards Fiscal Expansion. Pixabay

Bonds
As noted, before term spreads have been quite wide for this part of the cycle, largely reflecting the inadequate availability of risk capital versus the supply of bonds (the same inadequacy is being reflected as higher credit spreads in the loan and credit market).

Despite more than adequate liquidity now, risk capital has been cautious possibly due to lack of confidence on market risk, given the fiscal and bond supply overhang. Since a large term premium has already existed, we wouldn’t expect a significant further expansion just because the risk has now materialized.

Further we don’t expect the entire expansion to manifest in the Centre’s fiscal deficit. After sharing this with states and accounting for other levers built in, we are looking for a final fiscal deficit of 3.7 nper cent versus the 3.3 per cent budgeted. This will entail some additional bond supply eventually, but with the cushion that the Centre’s net bond supply was slated to fall substantially in the second half of the year versus the first.

Portfolio Strategy
With the prospects of monetary easing somewhat diminishing in incremental intensity, and accounting for the somewhat higher bond supply, we may expect some amount of curve steepening going forward. This may likely happen as market participants anchor themselves to 3 thoughts: One, liquidity will remain abundantly surplus. Two, repo rate is here or modestly lower. Three, prospects of a very large bond rally are somewhat diminished (although this view will evolve going forward depending also on how much net additional supply actually manifests for local absorption) . This will likely increase appeal for the front end of the curve versus the longer duration, hence creating steepening pressure.

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Reflecting the above thought, we have cut our recent duration elongation into the 10-14 year segment and are now refocussing on being overweight 5-7 year for government bonds in our active duration funds. For AAA corporate bonds, the relative value continues in up to 5 years. These segments could better align to what remains an environment of abundant surplus liquidity, a very attractive term spread, still general lack of credit growth, and continued global monetary easing. (IANS)

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Income Tax Officers Quit Work For Mental Peace

Tax officer quit service as they prioritise mental peace over work

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Income tax officers
Nearly two dozen gazetted income tax officers have called it quits in this financial year alone. Pixabay

It seems that some people prioritise mental peace over other things in life.

Under unrelenting workload and high tax collection targets, nearly two dozen gazetted income tax officers have called it quits in this financial year alone.

“The situation in our department is really bad. There is a lot of work pressure. During this financial year, about 22-23 officers have left,” Income Tax Gazetted Officers Association (ITGOA) Vice President Bhaskar Bhattacharya told IANS.

Bhattacharya added that pressure has been mounting in the last few years.

The ITGOA is an association of over more than 9,500 promotee gazetted officers from across the country.

The lower tax collection has rung alarm bells among policy makers resulting in pressure on field officers to collect more revenues. The income tax department has so far managed to collect Rs 5 lakh crore in direct taxes, less than half of the total budget target of Rs 13.35 lakh crore for FY20.

tax officers
Tax officers prioritise mental peace over burden of work. Pixabay

With economic growth being in the slow lane, achieving the yearly tax collection target is a big task for the tax department.

Asked if the pressure has indeed been immense, an office-bearer of the Indian Revenue Services Association (Income Tax) replied in the affirmative, but said he was not aware of the IRS officers leaving service due to high workload.

“People have left service, but mostly for personal reasons. Some of them wanted to settle overseas with their children or for starting a practice of income tax laws,” the officer said, wishing not to be named.

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Many businesses in the past have complained of tax terrorism. But the government has allayed their fear maintaining that only realistic collection targets have been set in consultation with the concerned officers.

Earlier, Finance Minister Nirmala Sitharaman went on multi-city tour to meet representatives of trade and business assuring them of no harassment by tax authorities. (IANS)