Budget 2019 Trades Off Fiscal Discipline For Growth, Says Indira Rajaraman

Former RBI Central Board Director Indira Rajaraman said fiscal consolidation was not a target of the budget.
The portrait of Mahatma Gandhi is displayed on an Indian rupee notes (Photographer: Brent Lewin/Bloomberg)  
The portrait of Mahatma Gandhi is displayed on an Indian rupee notes (Photographer: Brent Lewin/Bloomberg)  

Finance Minister Nirmala Sitharaman’s maiden budget has made a clear attempt to kick-start growth but that will come at the cost of fiscal discipline, according to Indira Rajaraman, economist and former director of the Reserve Bank of India’s central board.

“I think the gaze of the government has shifted away from the fiscal consolidation in view of the imperative to get growth kick-started,” Rajaraman, who was also on the 13th Finance Commission, told BloombergQuint. “Fiscal consolidation is certainly not one of the targets that the government had this year.”

Sitharaman, while closing her budget speech, said the government expects to keep fiscal deficit at 3.3 percent of the GDP. That would be the third straight year where the government has now deferred the 3 percent target under the Fiscal Responsibility and Budget Management Act.

As a whole I don’t think the government is bothered too much at this point with reining in with fiscal deficit.
Indira Rajaraman, Former Director, RBI Central Board

In recent years, delayed payments to governments’ suppliers and contractors has been one of the ways in which the government showed reduced expenditure and a lower recorded fiscal deficit. This time, she said, there will be a payments portal for those.

“If that is really done and if the payment delays are being reduced that will be a very good thing from a fiscal management perspective. But by the same token, it will also raise the deficit.”

Watch the full interaction with Indira Rajaraman here.

Here are the edited excerpts of the interaction.

How do you see the budget and its proposals?

Well, it is a very long statement as you know, and it covered a very wide range of proposals. Chief of these was a very clear attempt to kick-start growth. The corporate tax rate reduction, the reduction in scope of securities transaction tax, the effort to deepen the market for corporate bonds, to raise the statutory investment limit for foreign portfolio investment and the tax exemption for affordable housing. All of these were a packet of measures designed to improve access of corporate entities and industry in general to domestic and foreign financing and to improve the functioning of financial markets. So, I think that was the major thrust.

But when the Finance Minister claimed that the government was committed to fiscal consolidation, that statement was not quite right. Because the projected fall in fiscal deficit to 3.3 percent of GDP was predicated on a high nominal growth rate, which may not be achieved.

The headline fiscal deficit projection has some very ambitious math backing it. In this case, they are expecting 20 percent increase in revenue and net tax revenue to at a time when economy is growing at this rate. The first question is why are we even projecting these numbers?

That’s right, there is ambition in the projected revenue. There is probably some understatement in projection of expenditure. But at the end of the day if we take these numbers simply as they stand and the deficit numbers simply as it stands, in absolute terms it is Rs 7+ lakh crore. And if you normalise that by what is likely to be a more reasonable norminal GDP growth rate of 10.5 percent, then the fiscal deficit is going to 3.4 percent plus. And if you recall, nowhere in the budget speech did the Finance Minister even refer to the fiscal deficit. It was added on informally after the speech ended. Of course, the numbers are there in the budget at the glance.

So, I think the gaze of the government has shifted away from the fiscal consolidation in view of the imperative to get growth kick-started.

On the revenue deficit, which the government has stopped targeting, the number is higher than last year 2.3 percent. So, the attempt to bring down the revenue deficit is derailed.

That’s right. As you know in the new version of the amended FRBM act, the revenue deficit is not even been looked at.

But if we look past that, as I said, I would be very surprised if the fiscal deficit be anything lower than 3.4 percent unless the nominal growth rate of GDP is realised, which is very unlikely... So, I think fiscal consolidation certainly not one of the targets that government had this year.

But I must mention in this connection one thing which is positive, I think. Which is that as you know, in recent years delayed payments by the government to their suppliers and contractors has been one of the ways by which they have tried to paper over their expenditure to show lower recorded fiscal deficit. This time there is an announcement of a payments portal where suppliers can put there bills and be paid. If that is really done and if the payment delays are being reduced, that will be a very good thing from a fiscal management perspective.

But by the same token, it will also raise the deficit. Which is good thing. If by being transparent you are declaring the deficit as what it really is and not what is papered over, then that is a very good development. But as a whole I don’t think government is bothered too much at this point with reining in with fiscal deficit.

How do you view this debate around the extra budgetary resources pool. But beyond that the bigger debate is if this legit capital expenditure. How do you see that?

What has happened in the last financial year was that the Food Corporation of India and Air India borrowed from National Small Savings Fund instead of being directly subsidised by the government. So that is shifting out from governments own borrowing to extra budgetary sources. Because otherwise government would have borrowed and subsidised these organisations directly. So, there is a lot of this going on. I don’t know what they are going to do. They say they are going to bring it all on the budget. We have to wait to see what the intent is there. There is a lot that is not specified very clearly.

Another major fiscal expectation is that Rs 1.05 lakh crores will be raised from disinvestment. And one of the organisations mentioned in this is Air India. The budget speech was very short on details. It didn’t explain why this kind of realisation is expected in this year’s budget when repeated attempt to divest Air India have not succeeded in past. So, it has been short on details, short on failures in the past and long on expectation which is perhaps the way to go when you want to give the economy the business confidence that it needs. But from a transparency perspective, it would have been much better if there would have been open declaration of past failures and the determination to overcome those going forward.

There is a large number of around Rs 90,000 crore being budgeted from the RBI dividend. Some of this may be predicated on what the economic capital framework committee actually recommends or doesn’t. But is it possible that we get that dividend simply in the regular course of things?

Yes, the dividends that have been budgeted probably can be routinely are met by RBI. Anything that the Bimal Jalan committee recommends will be over and above that. So, I don’t foresee any shortfall on that front. Rs 90,000 crore is a big number and they will probably achieve it this year.

There are some other measures with respect to RBI which are worth mentioning. One is that regulation of housing entities is now being shifted back to RBI from the National Housing Bank. This is a very big move because initially it was moved out of RBI on the ground that the RBI’s regulatory gaze was too wide and that they needed to concentrate more on banks, hence housing finance companies were moved out.

So, they are being moved back in. It increases the workload of the RBI enormously, I might add. The other is that the regulatory powers of the RBI in respect to NBFCs are going to be strengthened.

On both grounds, an attempt has been made to strengthen the RBI’s regulatory powers. Of course, what matters is what the RBI does in terms of supervision corresponding to this regulation. As you know the important thing is how well the regulations are actually adhered to and that is where RBI has unfortunately slipped in the past.

Government laying down its intent to borrow in foreign currencies, was another headline. Should we move in that direction or not?

As I said earlier about the government’s gaze is shifting away from fiscal consolidation.

It knows perfectly well that far from going down to 3.3 percent, the fiscal deficit is going to climb up. Especially if payment delays are reduced and certainly if the nominal growth rate is below what is being projected. Then that being the case, the reason this borrowing foreign currency has been introduced is so as to not roil the market and raise expectations of yields of government bonds going up in coming year. If some of the borrowing needs are met in foreign currency abroad then those securities are not going to be sold in domestic markets and they will not have any impact on the yields.

Is this a wise move? No. It opens up us unnecessarily to extreme volatility in the event of oil prices going up, which they very well could and the rupee falling, which it well could. So, it’s a gamble which the government clearly thought worth taking at this juncture.

There is no question about the fact that the clear motive of the government in the whole package is to get growth going. Everything else is secondary. This too has been brought in as perhaps an unnecessary evil to combat the slowing down of the economy.

Is this a way to alleviate the fear of crowding out and could it be done within prudential limits?

Yes, look the limits clearly matter. The macroeconomic situation also matters. The fear is if something was to happen to the current account deficit, because of some exogenous event like oil price volatility, if that were to happen at the time when these bonds mature then we could be in a very tight spot.

In previous years, the way this shortfall has sought to be alleviated has been through borrowing from NRIs and in foreign currencies not necessarily in rupees. But this time government is going all out and borrowing in international financial markets not particularly from NRIs. Probably reflecting, projecting rather, a degree of confidence in the nternational financial markets on India and thereby crowding in more foreign equity funding perhaps and getting growth going.

Does it help in internationalisation of the rupee? Can it be done within strict prudential limits?

Yes, of course it does. But I think that kind of confidence is little premature at this juncture. The Indian economy is severely resource constrained on multiple fronts.

I have written about severe water crisis in this country which could by itself torpedo the entire growth engine. So, I would have much preferred to see more attention to the structural constraints domestically, to see more fiscal consolidation, more conservatism on that front. And I don’t think this gamble of borrowing abroad at this juncture was quite justified except, as you say, if it is kept in prudential limits may be 5 percent or something like that incrementally, then maybe it won’t do us much damage.

But there are so many structural constraints in the Indian economy. There is water, labour market, factor market, land markets and various others last mile things. Just for instance, export industries are not getting their refunds on time on GST mechanism. All these things are very important factors constraining growth in India and it’s very important to take them on.

A word on what seems an attempt to get credit flow going into the economy. Rs 70,000 crore for recapitalisation plus the NBFC’s backstop they have provided.

The NBFC backstop was good, I think. Although it has to be done prudentially. Distinction has to be made between well managed and badly managed NBFCs.

The Rs 70,000 recapitalisation of PSU banks was again needed. Once again if it would have come with more discretion, perhaps it will be exercised with discretion, given more to well managed banks and less to banks which clearly have been ill-managed, then perhaps it will get us where we want to be.

But I think in making domestic finance available more important than all of this is the bit to get corporate bond market going to make it function more effectively. There are numbers of measures there and for long-term bonds for infrastructure funding. Those, I think ,are more stand-out measures than recapitalisation of banks, which is good.

Do you expect to see some growth recovery from here on?

Yes, there certainly will be some growth recovery. Whether we will see that in current fiscal year I don’t know. Remember we are more than one quarter through the current fiscal year and these measures that have mooted are not going to be come into the force or have any impact immediately. So, I would say the quarter one of the forthcoming fiscal year is when we truly see the growth impact. As the result of all these measures, growth will be much higher than 7 percent perhaps even as higher as 8 percent. But for the current fiscal year I don’t see much growth impact really happening except toward the end of quarter four.

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