Budget 2022: TV Somanathan On Tradeoff Between Spending And Fiscal Consolidation

India's budget for 2022-23 targets to bring down its fiscal deficit by 0.5 percentage points from 6.9% to 6.4% of the GDP. The modest reduction came despite the government holding high cash balances with the central bank and the recent buoyancy in tax collections.

The higher-than-expected level of fiscal deficit, and consequently gross borrowings of Rs 15 lakh crore, pushed up the benchmark bond yield sharply to nearly 6.90%, about 30 basis points higher than where it was trading before the budget announcement.

"We are not a company, we don't have to meet market expectations," said TV Somanathan, finance secretary to the Government of India, in a conversation with BloombergQuint. Somanathan went on to explain that the choice between continuing to spend and bringing down the fiscal deficit at a slower pace was a conscious one.

That was a call based on what, at the margin, is better for the economy, he said. "For us, the risk-return tradeoff was in favor of spending marginally more while of course consolidating at a pace of 0.5 percentage points," said Somanathan.

Somanathan pointed to the fact that the government brought down the fiscal deficit from 9.2% of GDP in FY21 to 6.9% in FY22. This, he said, was the fastest consolidation in India's post-liberalisation economic history, though he acknowledged that the levels of GDP played a role in that decline.

In FY23, the government had budgeted to borrow a lower proportion of its deficit from the National Small Savings Fund compared to last year. In FY22, the government borrowed Rs 5.91 lakh crore from small savings and in the new fiscal it intends to borrow Rs 4.25 lakh crore.

This, too, pushed up market borrowings.

Could the government have chosen to keep borrowings in check by borrowing more from small savings or using high cash balances lying with the central bank? "Let's see if we end up having large cash balances at the end of the year," said Somanathan. The lower borrowings from small savings, he said, were based on expectation that inflows into these schemes may slow in the new financial year.

"In the current year, because we have had huge inflows of small savings, the market borrowing proportion is lower," he said. "Next year we have taken small savings growth at 10% over the previous year's budget, not at the level we've actually seen this year."

According to Somanathan, inflows into small savings tend to be very interest-rate sensitive. Last year, low bank deposit rates may have prompted a shift into small savings. "If the interest rate environment changes, then we may not see those kind of small savings inflows."

While choosing to raise its total expenditure by 4.6%, the government pushed up its capital expenditure sharply from Rs 5.5 lakh crore last year (excluding an adjustment for Air India dues) to Rs 7.5 lakh crore this year. As part of its capital expenditure, the government has earmarked a Rs 1 lakh crore long-term loan to states for capital expenditure.

Somanathan said that the decision to set aside that loan for state capital expenditure was based on feedback from state finance ministers who had found a similar provision made last year.

"The reason for doing this is that the basic assumption or thrust in this budget is to revive employment and growth through infrastructure investment. Basically, the thrust is trying to create gainful employment rather than palliative employment or relief expenditure," said Somanathan. "To do that, we need to have this expenditure being actually spent on the ground and we need it to be widely disbursed geographically and sectorally."

According to Somanathan, the capacity of central undertakings and central ministries to absorb a huge increase in capital expenditure is limited. Besides, central projects are confined to certain geographical zones and are mostly along railway lines, national highways and such.

Central government capex during the year, excluding the loan to states, is budgeted at Rs 6.5 lakh crore. It was at Rs 5.5 lakh crore last year. Compared to the pre-pandemic period, when central government capex was between Rs 3-3.5 lakh crore, spending under this category has risen sharply.

Can the government spend these funds effectively?

It remains something on which the government has to pay a lot of attention, said Somanathan. "Spending Rs 6.5 lakh crore next year is a challenge. Also the nature of the projects the central government spends on are those where there are a number of clearances such as environment, land acquisitions, etc. They are prone to taking longer than the small capital projects of the state," he said. "But I think this going from Rs 5 lakh crore to Rs 5.5 lakh crore and then Rs 6 lakh crore is not that big of a stretch."

Somanathan clarified that there is no shift of liabilities of public sector units onto the capex budget. In the case of the National Highway Authority of India, direct budgetary support has been provided to help the agency reduce borrowings, he said.

Commenting on the expected outlook for the economy, Somanathan said that the 11.1% nominal GDP growth, based on which budget projections have been provided, is achievable.

Beyond that there are non-economic factors at play, particularly the response to Covid, and that's not something "we can control", he said. "If you keep shutting down markets two days a week, if you say you cannot go to a cinema or a restaurant, then you will never get the kind of consumption you get in a normal economy."

Watch the full conversation below: