Chidambaram Highlights India’s Revenue Deficit Problem
Higher government borrowings are being used to finance revenue shortfall and not for new investments: P Chidambaram
The breach of the revenue deficit target for fiscal 2018 is as much a matter of concern as the fiscal deficit slippage, according to former Finance Minister P Chidambaram. That’s because the government’s higher borrowings are being used to finance the revenue shortfall rather than for fresh investments, he told BloombergQuint’s Sanjay Pugalia in an interview.
The government in Union Budget 2018 said that the fiscal deficit for 2017-18 is likely to be higher at 3.5 percent compared to the targeted 3.2 percent of the GDP. “That 0.3 percent is an additional Rs 54,000 crore. You must add the additional Rs 37,000 crore that ONGC borrowed [to fund its HPCL stake buy] and gave to the government,” the senior Congress leader said.
That takes the government’s borrowings to around Rs 91,000 crore without even accounting for the Rs 80,000 crore they expect to borrow through recapitalisation bonds for funding state-owned banks, he added.
I want to know where that Rs 91,000 crore went. If it had gone into investment, maybe I’d have said alright. This entire Rs 91,000 crore has gone into the revenue deficit. It is bad.P Chidambaram, Former Finance Minister & Senior Congress Leader
Revenue deficit is the difference between the government’s revenue receipts and its revenue expenditure, which goes mostly towards meeting its current expenses like employee salaries, interest payments—not towards generation of capital. The government now expects its revenue deficit for 2017-18 to touch 2.6 percent of the GDP compared with the earlier estimate of 1.9 percent.
In his Union Budget speech, Finance Minister Arun Jaitley had said that the government expects lower revenue due to the newly implemented Goods and Services Tax and a shortfall in non-tax revenue due to certain factors such as the deferred telecom spectrum auctions. He said the government will accept key recommendations of the NK Singh Committee on fiscal discipline, which also means that it will stop putting a target on the revenue deficit.
Chidambaram said the government’s new divestment target of Rs 1 lakh crore in 2017-18 has also been “inflated” because of the Rs 36,915 crore majority stake buyout of Hindustan Petroleum Corporation Ltd. by Oil and Natural gas Corporation Ltd. Without that, the government would only manage Rs 63,000 crore by selling stake in public sector units, which is lower than the earlier Rs 72,500-crore target.
The Rs 37,000 crore is an ONGC gift to the government.P Chidambaram, Former Finance Minister & Senior Congress Leader
‘World’s Biggest Unfunded Jumla’
Chidambaram criticised the government for schemes proposed in the Budget. The government does not have enough money to fund its ambitious National Healthcare Protection Scheme, Chidamabaram said. “This is the world's biggest unfunded jumla (promise),” he said. “Even at a 2 percent premium rate, to cover 50 crore people, you'd need Rs 1 lakh crore and there is no provisioning in the budget for that.”
Instead of an insurance-based healthcare model like the Obamacare in the U.S., the government should have opted for the European model by putting in the same money towards expanding public hospitals and healthcare facilities for the people.
Insurance-based healthcare benefits insurance companies, not the people.P Chidambaram, Former Finance Minister & Senior Congress Leader
He also said that starting the scheme on a trial basis, with an initial provisioning, does not make sense because “you can't pick and choose who will fall ill. You have to cover all 50 crore people.”
The government should make public their plan for the healthcare scheme and invite public debate on it, he said.
Running Out Of Gas
The Narendra Modi administration does not do adequate background work before making policy decisions, according to Chidambaram. “They leap and then they look back,” he said. “They've done it in the past during demonetisation. They didn't calibrate ATMs. They didn't have enough currency in their vaults. That is the track record of this government.”
The left hand of this government doesn’t know what the right hand is doing.P Chidambaram, Former Finance Minister & Senior Congress Leader
Chidambaram said as the administration enters its fifth and final year “they've run out of gas”. The government's “car will break down sometime this year, or will stop at the end of the year”.
Also Read: Government Gives Itself A Fiscal Long Rope
Here are edited excerpts from the conversation.
You spoke about the Health Protection Scheme. Now they have come up with some numbers. Are they not convincing enough?
They have not come up with any numbers. One officer says it will cost Rs 8,000-10,000 crore. Another officer says it will cost Rs 12,000 crore. Another insurance company officer says it will cost Rs 20,000 crore.
No secretary to government is willing to put a figure on it. Ministers are not willing to put a figure over it. We know that there are half a dozen states in the country which are running similar programs where the insurance cover is for Rs 1 lakh. If you add up the premium, that is being contributed by all these states, they are now paying a premium of Rs 1 lakh crore. So, to cover up to 1 lakh population in about half a dozen states, the premium is Rs 1 lakh crore. You are now saying that you will cover 50 crore people for Rs 5 lakh each. Even at a premium at 1 percent, no insurance company will give you an insurance policy for Rs 5 lakh crore at a premium of one percent. Premium of one percent means Rs 50,000 crore, premium of 2 percent means Rs 1 lakh crore and premium of 3 percent means Rs 1.5 lakh crore. I am taking the middle number. Rs 1 lakh crore is the premium, but where is the provision?
Arun Jaitley said that it is not about Rs 1 lakh crore. Between Rs 5,000-10,000 crore, we can launch the scheme for this year at least.
How could you launch a scheme if you want to cover all 50 crore people? Once you say that you will cover 50 crore people, how can you pick and choose. How do you know A will fall ill and B will not fall ill? You have to cover all 50 crore. Or will you go state by state. Will you cover only the BJP states first?
States are free to not choose these schemes.
That is an another jumla. Initially, the announcement did not say anything about states sharing the burden. Suddenly, they come out and say 40 percent will be given by states. Which state is being consulted?
How can a government can be so non-serious that without homework that they will launch the world’s biggest insurance scheme?
This is world’s biggest unfunded jumla. Which state has been consulted? Which state has agreed to come on board? Which state has agreed to contribute 40 percent? Andhra Pradesh, Tamil Nadu are running these scheme, why should they give up their schemes and join you scheme?
Just before an election year, the government’s credibility is at stake. They must have done some homework.
No, they have not. Ask them to produce the paper they have got. Before an announcement of this kind is made, I agree that there may not be a Cabinet note, but they should have a basic paper. Ask them to publish the paper and invite a public debate.
Remember how Obamacare was launched. Huge amount of research, a document is produced, placed in the public domain, it is debated and then it is launched. Besides, we are seriously questioning an insurance-based health care program. This is the American model. The British and European model is not based on insurance. But it is based on expanding public hospitals and public health facilities which are free to the people. For the same money, you should be building more public hospitals at district, taluka and block levels. Hire more doctors, buy more equipment, hire more nurses, install more beds, so that people can get access to medical care for free.
The thing about insurance is that you can say 50 crore people, but actually you will be distributed to 5 lakh people.
But you have to cover 50 crore people. You can’t to pick and choose who will fall ill. You have to cover 50 crore people and for that, you have to pay a premium.
Insurance-based health care benefits the insurance company and not the people. Anyway, their track record is, they don’t look before they leap. They leap and then look back.
They have done that in the past with demonetisation. They didn’t calibrate the ATM machines. They didn’t know that the new Rs 2,000 notes will fit into the machine. They did not have enough currency in their vaults. The left hand of this government does not know what the right hand is doing. Neither the left hand nor the right hand has anything to do. It is all decided in one place and by one person and the left hand is told do this and the right hand is told do that.
On your pakoda economy statement, Amit Shah said that doing any job with dignity is a job creation.
I said selling pakodas is honorable self-employment, it is not a job. We are talking about jobs. Go to the ILO definition of a job. A job means, a certain degree of certainty, regulatory in payment and security. That’s a job. I am a lawyer, I don’t hold a job, but I am self-employed. There are other lawyers who are employed in some big company as a legal assistant or a legal officer, then he has a job.
We are talking about jobs. He said we will create 2 crore jobs a year. I have not decried pakoda selling. But even the young men who sell pakodas, what did they say? Do they want to sell pakodas? They protested against PM Modi’s rally in Karnataka wearing their graduate gowns. A graduate does not want to sell pakodas. He is doing that because he has nothing else or nothing better to do. He has to earn a living. But don’t count that as a job.
This government hopes that based on rural infrastructure spending schemes like irrigation and Mudra, they will be able to create a good number of jobs in this election year.
They can’t. The finance minister’s Budget speech confirms that the average Mudra loan is Rs 43,000. I will give you Rs 43,000 today, please start a business and create a job. How can you create a job with Rs 43,000 investment? Rs 43,000 can help a cobbler or a shoe repairer may buy some string, leather, needle. A hairdresser can buy some knives, shaving cream. The carpenter can buy some tools. Hoe does Rs 43,000 create a job?
So, the government is saying we are not creating job seekers but job givers.
At Rs 43,000, you can give a job.
He will employ at least himself.
That is not a job. Most people are employed in low level, low skilled jobs because they have to earn a living. They have to live somehow. Why does a graduate apply for a peon’s job? Why does a PhD., MSc, MBA apply for peon’s job? Because he has to make a living, he is desperate. That doesn’t count that as a job.
What is wrong with LTCG tax? One asset class which is not taxed so far should be taxed.
I am not against taxing every asset class. Some asset classes have been exempted for a reason. Why was LTCG tax removed and STT introduced? LTCG tax was removed because we wanted to encourage retail participation in the equity market. That culture is not there in India and it started in urban metropolitan centres. But we want this culture to go to the tier 2 and tier 3 towns, rural areas. People must save in risk capital. In order to encourage that, we had abolished LTCG tax.
Now if LTCG has to be re-introduced, as a principle I have no objection. But question is, is this the right time to do it when interest rates are high, when investments are not taking place, when credit is not growing, when Indian industry is shy of investment, when excess capacity is there. Is this the time to tax the equity investor who is willing to put his money in risk capital? I think the issue is debatable.
Do you think foreign investors will now be discouraged and pull out?
They will not pull out, but they will go to another jurisdictions. They will move to Singapore, Dubai. There are two major bourses to our left and right. Don’t think Mumbai is the biggest bourse in this region. There is one in Singapore, one in Dubai, one in Hong Kong which is well established, there is one in Shanghai. Therefore, you have to weigh the pros and cons and then decide if this the right time to introduce LTCG tax.
So, how should we interpret the current fall in the stock market?
We can always blame multiple factors but as long as LTCG is one of the factors, then it is a drawback.
This will also create the tendency of behaving more a trader rather than an investor.
No, a lot of people will move to other asset classes. They will move to gold, real estate. You can’t tell millions of people which asset class they should invest in. I suspect that a lot of money will move to gold, which is unproductive. Investment in the equity market, the money is available for industrial investment or business investment. Investment in gold is locked-up investment, it becomes a dead investment.
Can you articulate your thoughts on the revenue deficit?
The fiscal deficit limit is being breached and the revenue deficit limit has also been breached. They are borrowing 3.5 percent this year. They should have borrowed 3.2 percent. That 0.3 is an additional Rs 54,000 crore. You must add the Rs 37,000 crore which ONGC borrowed and gave to the government. That is a device. So, Rs 91,000 crore is an additional borrowing. I am not even counting the Rs 80,000 crore for recapitalisation. I want to know where this Rs 91,000 crore went. If this Rs 91,000 crore had gone into investment, then it is alright as they are borrowing for investment, but it has gone into revenue deficit.
How bad is that?
It is quite bad. The revenue deficit is about 2.6 percent. The Rs 91,000 crore of additional borrowing is going into the revenue deficit.
For non-tax revenue, the government doesn’t seem to be convinced for bold and clear measures, it is pocket to pocket transfer.
A Rs 37,000 crore from ONGC is a gift to the government. The RBI shut the door and said we can’t give you more because demonetization has cost us a huge amount of our profits. The dividend income from PSUs have come down. They have got disinvestment. Other receipts they seem to have got more but that is inflated by Rs 37,000 crore. They have not collected 1 lakh crore but really collected only Rs 63,000 crore. They have run out of ideas. They have run out of gas. They are stepping into the fifth year and they have run out of gas. This car will break down this year or it will come to stop at the end of the year and for that we have to thank god.
As far as their voter outreach is concerned, you don’t think that narrative doing fine and being amplified.
The last mark sheet came out of Rajasthan. The one before that one came out of Gujarat. I can’t go by an examination of 2-3 years ago. I am testing your current learning ability wherein the last marksheet was in Gujarat. In Gujarat, you [the BJP] aimed at 150. You had 130 odd seats and you came down to 99 seats. I think that was a defeat for the BJP. It is a state of the Prime Minister, the party president. They poured in enormous resources. The entire cabinet was campaigning there, the PM himself addressed 40 rallies. 99 seats mean that you barely passed. 40 marks out of 100.
The next examination was in Rajasthan. They had a 2,60,000 margin which is now become minus 1,97,000. You had another margin of 84,000, it has come down to minus 1,26,000. You had another margin of about 12,000 which became minus 12,000. It indicates that nobody is willing to buy your story. Urban towns like Alwar, Ajmer did not buy your story. Rural Rajasthan did not buy your story. The three constituencies are one in the west, centre, and east. East, Central, West Rajasthan didn’t buy your story. Youth, trading community did not buy your story. So, who is buying your narrative? There will be other tests, I am not saying what the result will be. There will be other monthly, term, class tests. There are two assembly seats coming up in Madhya Pradesh. That is Jyotiraditya Scindia constituency. Then there is Karnataka. In Bengal, the margin of 2 lakh has become margin of 6 lakh for the Trinamool. There is no silver medals in an election, there is only one medal which is gold.
Even if people are not impressed by Modi or BJP, getting them to vote is a big challenge and he is par excellence.
They tried it in Rajasthan and it didn’t succeed. I agree that Congress party should become more of a fighting machine. We almost did it in Gujarat. In Gujarat, in 12 polling booths, if we had got the same votes that we got in 2014, then we could have got 5 more seats. If we aligned with NCP, NCP would have got one more seat and we would have got one more seat. So, our 80 could have become 87 and their 99 could have become 92. Therefore, the party will have to get stronger. You can’t depend upon the weakness of the opponent.
Congress lost 16 seats by a margin of 1,000-3,000 votes in Gujarat. To get those 3000 more voters to come to booths to vote for your party is the challenge, and Mr. Modi is super-efficient.
We can be as efficient as he is in other states. In Gujarat, we almost made it. But in Karnataka, our organization is just as strong. By the time Rajasthan election comes, we are also paying attention to it. The party units will become stronger.
Do you think that what they have done with MSP will work?
For four years, they were sleeping like Kumbakarana. In the fifth year they wake up and said they will give you cost plus 50 percent. Rabi is over, kharif is coming in September-October. So, whatever cost-plus 50 percent they give, will only be effective for kharif crop which will be in October this year. Nothing between now and October for the farmer.
Then you said cost plus 50 percent. Dr Swaminathan, Dr. Ashok Gulati and many other experts have asked which cost. There is C1 plus family labor, there is C2. Which cost? They don’t tell which cost they will take into account. And then they say we have already given cost plus 50 percent for some crops. So, which crops have you given? All this is bluff. Come out with a concrete paper telling us, which crop, which cost, when you will give, how you will calculate. Give us a complete cost data. There is something known as cost accountancy in this country. You hire a cost accountant and tell us how the cost worked out and then we will tell you. If you have already given cost plus 50 for some crops, why is there so much farmer distress.
So what will happen to inflation, interest rates, investment, and growth?
The fiscal deficit rise itself will increase inflation. In order to make exports competitive, the Economic Survey says that the rupee is overvalued. So, you allow the rupee to slide downward, that will increase inflation because imported goods will become costlier. If you give MSP, it has a mild inflationary effect but there is no trade-off between MSP and inflation. MSP is for the welfare of the farmers, so it is mildly inflationary. So, all put together, I don’t think inflation will come down. In December, CPI inflation was 5.1 percent. Let’s see what the number comes in January and February. And then RBI will meet and give us its report. I can’t see inflation coming down. Interest rates will go up. Bond yields have already gone up. When bond yields go up, that is an indication that interest rates will move up.