We are seeing recovery in a number of sectors. Whether it will be sustained is to be seen. So, I am cautiously optimistic, says T.V. Somanathan, expenditure secretary
A day after finance minister Nirmala Sitharaman announced fresh measures to stimulate consumer spending by incentivising central government employees and via additional capital expenditure, T.V. Somanathan, the expenditure secretary in the Union finance ministry, explains the rationale behind the move. Edited excerpts from an interview:
What’s your assessment of the state of the economy?
The worst effects of the pandemic are over. We are beginning to see recovery in a number of sectors. Whether it is power consumption or goods and services tax (GST) collection, the recovery is fairly good. Even in terms of consumer behaviour, there is some recovery. Whether it will be sustained in the remaining quarters of the year is to be seen. So, I am cautiously optimistic.
Will the measures announced by the Centre so far be sufficient to put the economy on a sustainable recovery path?
I will look at it slightly differently. I don’t think there is any fiscal measure which the government can take that can completely obliterate the adverse effects of the pandemic. Just as there is no vaccine for covid, public expenditure is not a vaccine for the covid-affected economy. At best it can be an HCQ (Hydroxychloroquine); it is an insufficient remedy for the problem because the basic problem is people need to feel free enough to move, to communicate, to attend schools, to go to cinemas, to go to restaurants. That can’t be done by a fiscal stimulus alone. I don’t think fiscal stimulus is going to be a complete answer, nor does evidence from other countries point to the fact that it has been a complete answer. If you look at other countries which have had very large fiscal packages, they have not escaped large reductions in GDP. Yes, there is a correlation between government expenditure and level of GDP, but I don’t think the government alone, even with a large stimuli, will be capable of addressing the problem. The part of the problem is going to be addressed when the pandemic recedes. It will be an organic process wherein the economy will recover.
Many analysts say the initial spurt in activity we are seeing may eventually decline once pent-up demand falls. Do you agree with that?
It is a possibility, but I don’t think that is likely, because if we were seeing pent-up demand, then we should be seeing a huge spike (in consumption), (or) if it was significantly higher than last year’s figures. I don’t think that is the case. I am not convinced by the pent-up demand argument. I think it is restoration of normal demand.
What was the idea behind the recent measures announced by the finance minister?
The finance minister put it in a simple and effective way: Today’s solutions should not be tomorrow’s problems. We do have experience in the past that a large stimulus is given in response to an exogenous shock and it is widely welcomed, but it can sow the seeds of subsequent problems. The expenditure stimulus that has been put out now has two elements: one is self-financing. If you look at the festival advance, it advances the expenditure from the future to the present. So, it changes the timing of the expenditure and gets recovered against future salary. That is exactly what we want. We want (people to have) something to spend now, we don’t necessarily want to keep the expenditure high into the future. In the case of leave travel concession, we are trying to advance the expenditure because if it was not given then people would wait until they can travel. In this pandemic situation, we are quite doubtful that many government servants would want to undertake travel for pleasure just for the sake of LTC. What we are saying is we are not insisting that you travel, instead we are insisting that you use this as a voucher, which will essentially give you a discount of 33% on anything that you buy, provided it is taxable by 12% or more and provided you pay it digitally. You need all these conditions to make sure the expenditure actually happens and, secondly, to leverage private savings of government servants to stimulate the economy. Both LTC and festival advance do not involve long-term excess fiscal commitment. We are assuming one-fourth of government servants will opt for it. The second component is capital expenditure, which is an extra fiscal commitment. But a lot of studies, including the one by N.R. Bhanumurthy, and the RBI’s monetary policy report of April 2019, have given estimates of the multiplier of domestic capital expenditure. The figures range from 2.5-4%. So the domestic capital expenditure has a high multiplier effect. We are hopeful that while expenditure will go up, GDP will go up more than proportionately. Therefore, it’s a sustainable increase in public expenditure. So we are keeping an eye on debt sustainability.
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