In an interview, Chakraborty explains the thinking behind the budget numbers. Edited excerpts:
What was the underlying philosophy behind the budget this year?
It is clearly articulated in the budget. It is a budget to boost investment, income and enhance purchasing power. To do it, it has been explained that you adopt a three-pronged approach to meet the aspirations of people, through education, agriculture improvement, economic development which in turn, have an impact on industry, investment and infrastructure; build a caring society that is compassionate and humane. For that, focus has been given on social welfare, women, child development, taking care of the culture and taking care of the environment. To support this, there is a governance framework and there is a financial sector architecture.
Quality of expenditure is set to decline in FY21 with pick-up in revenue deficit. Do you think the government should go back to the earlier practice of targeting both fiscal and revenue deficits?
Revenue deficit is not always a function of expenditure. It could also be a function of revenues not fully coming because of structural reforms in the fashion of direct tax relaxation which could not have given a tax buoyancy in the same year. So, we have been realistic in our assumption of revenue and we have been very, very aggressive in doing quality expenditure. So, there is a big rise in capex, of almost ₹74,000 crore from Budget Estimate (FY20) to Budget Estimate (FY21). We propose to invest equity ( ₹22,000 crore) into two infrastructure companies (National Investment and Infrastructure Fund and India Infrastructure Finance Company) who will leverage to create ₹1.2 trillion of funds. So, if anything, it improves the quality of expenditure.
But we were targeting both fiscal deficit and revenue deficit till a few years ago and in fact, the plan was to bring down revenue deficit to zero.
What we are targeting basically is fiscal deficit and ultimately debt to GDP ratio. That’s a critical number. The moment you start addressing fiscal deficit, revenue deficit will have to be addressed, it is a sub-part of fiscal deficit.
There is better transparency in disclosing the off-budget items this year. How much would be the fiscal deficit now if one adds up all off-budget liabilities?
That is something that people don’t understand. If I tell a company that take into account all your guaranteed loans and loans by your subsidiaries in your profit and loss, what will happen to their balance sheet? Economists, and I will say, perhaps those who don’t have a full appreciation of public financing in India don’t understand this. The off-budget loans or extra-budgetary resources are essentially funded by the government whenever they fall due both in terms of interest and repayment, unless the entity raises money on its own. However, they are provided loan by some other entity. It could be NSSF (National Social Security Fund) or anybody else. How do I bring it on my own balance sheet because it would be akin to the example I gave you? So, we provide what is required to be provided and we don’t provide what is not required to be provided.
But the government shifts the expenditure on many items such as petroleum subsidy to the next year because our accounting system is not cash-based. The companies don’t do it.
No, no. That understanding of cash-based or accrual based is about how we treat our income and expenditure of that item. But the structure will not have flow or stock problem. What is a flow of permanent nature will be accounted. Did anybody say that the ₹3.5 trillion (recapitalization) bonds that we have given to public sector banks should be taken into account in the fiscal deficit? This becomes a selective exercise of just putting a blame by putting out a number by the economists. These days, they also like everybody else want to play a T-20 match to make themselves look very popular. So, we decided, we are explaining everything and if a question comes up, I will explain.
On payments to the Food Corporation of India, you don’t think it should be added to the fiscal deficit?
No. You tell me. Can you convince me why it should be added?
Because that money should be paid by the government because ultimately this is food subsidy?
No, that is where the mistake takes place. There are two components to it: food security buffer stock which is fully paid by the government. Second is the difference between the carrying cost and the cost of issue. Now they keep a lot of stocks beyond the buffer. Ideally, the government of India is not responsible and we could tell them go and raise the money whosoever you want to raise it from. But no, government takes the responsibility. Now you are telling me we should fund only that additional over and above the buffer. How that is to be funded is not decided by government of India. Now that question is irrational at best. The simple thing is wherever they are raising that money, we are fully protecting that amount. So where is the problem?
At a time savings rate is stagnant and economists have been calling for measures to boost savings which can subsequently fund investments, don’t you think doing away with tax saving exemptions under the income tax rejig sends the wrong signal?
Boosting savings not through artificially heightened rate of interest when the rate of interest has stabilized through a market-driven mechanism. We would be distorting that structure. So, that’s a wrong way of doing it.
Fair enough. Not through artificial means, but by other ways. Is it not a disincentive to save if you are taking out the exemptions in a scenario of low savings rate?
We have not taken out. It’s a part of either/or. People have choices. Let them exercise choices. I may not like that advantage of ₹1.5 lakh (tax deductions).
But are you concerned that savings rate is low?
No. Anybody who wants to save will continue to save.
Why government is conservative on spending in its budget?
No, the government is not conservative. Let me give you a number. We have increased allocation on capital account to ₹4.12 trillion in BE FY21 from ₹3.38 trillion in BE FY20 which is ₹74,000 crore more.
But you could have maintained fiscal deficit at 3.8% of GDP in FY21, arguing that government needs to spend more to boost the economy.
I have done everything and still it is 3.5%. Why do you want me to breach? The system has a limitation of absorption beyond that. Ultimately, money has to be spent. If this year, X amount of money is spent, next year 10X cannot be spent.
You are talking about capex. What about putting more money into hands of the rural poor through MGNREGS?
₹60,000 crore has been provided as a backstop to the rural employment guarantee scheme.
But that is lower than the revised estimate (RE) of FY20.
You should always compare BE (budget estimate) to BE. REs are exigency numbers. For MGNREGS, we provide money on demand basis.
But at a time of rural distress, economists think you should have actually signalled your readiness to provide additional funds through higher allocation for MGNREGS.
I think the effects of the budget ends when the money cannot be spent. Impact is only when the money can be spent. And the money is not on entitlements alone, money is for creating assets which gives us return, gives us income, boosts purchasing power and takes care of savings subsequently. Any other means anybody suggests that money should be thrown away is calling for imprudence of very high order.