 "A sound fiscal policy can stabilise the economy: Vitor Gaspar")
India’s fiscal deficit target of 3.5 per cent of gross domestic product (GDP) for 2016-17 is based on realistic revenue projections, says Vítor Louçã Rabaça Gaspar, director, fiscal affairs department at International Monetary Fund (IMF). He tells Dilasha Seth that public investment in infrastructure has a positive impact on economic growth. Edited excerpts:
Finance Minister Arun Jaitley has decided to stick to the fiscal consolidation path for 2016-17. Do you believe the fiscal deficit target of 3.5 per cent of the GDP it is based on credible revenue estimates?
Our understanding at the IMF is that the government is well on track to do the Budget execution for 2015-16, of 3.9 per cent and 3.5 per cent for 2016-17, which, in our view, is based on realistic revenue projections. From that view point we believe that the numbers being put out are credible. One of the main benefits associated with the government persevering the budget adjustment plan is precisely to ground credibility and confidence. For a country like India, which is one of the bright spots of the global economy, grounding credibility and confidence and making fiscal policy one of the pillars of the growth and development strategy is crucial.
If you think about the balance between expenditures and revenue in India, there is a significant gap, which for many years has been at seven per cent of the GDP. If you look at long-term, you expect this gap to significantly narrow; so the fiscal policy can perform the role of stabilising the economy and underpin the strategy of growth and development. But at this point the position of the general government is compatible with the stability of the public debt to GDP ratio. There is no immediate urgency associated with that. So there is an issue, but it is an issue that is being tackled with very gradual adjustments strategy of the government.
How do you think India can lower its fiscal deficit?
On how things will evolve from a longer term perspective, there are two aspects that are crucial to look at. They have to do with rationalization of tax system. And one very important example is that the GST. GST in the pipeline as you know is designed as a VAT and it has three very important characteristics. One, it is based on a very wide tax base and that’s why more than 150 countries around the world have adopted a form of VAT and it is a very reliable and reasonable revenue neutral source of tax revenue. Second, the GST promises to contribute quite substantially towards integration of India’s economy and so to create a huge Indian single market. That’s a very important aspect. Third, it is a competitiveness friendly tax as it allows for deductions. It is a tax particularly appropriate given India’s integration with global economy.
The government is keeping up the capital expenditure to spur growth. How important is it according to you?
It is important to improve the quality of spending. Here the example is infrastructure investment. India will be the most populous country in the world by 2030 and we need to think about rural population in India now in process of urbanisation. This growing population will have immense needs of infrastructure in this time of urbanisation. At the same time you have infrastructure gaps in water, sanitation, electricity, transport, roads or railways. There is quite a lot that needs to be done. It is not only about quantity but also about the quality. Therefore it is important to do quite a substantial upgrade in the process of governance and management of these resources. Government is indeed working towards it.
How relevant it is for India to keep up public spending, despite challenges from the fiscal front?
When you look at expenditure, it is important to recognise that In India, public and private investments are complementary in nature. A recent IMF study has documented three important findings. First, in India public investment does have a positive impact on economic growth. Second, which is more surprising and interesting is that in India, public investment crowds in private investment. It is complementary to private investment. It is not substituting for the lack of private investment, but on the contrary by boosting spending, the state is creating conditions that will allow private investment to recover. Third, when infrastructure spending is well targeted and projects are taken into completion, the impact of public investment is very favorable. Therefore, the quality of public investment management and in particular quality of implementation is very important.
How do you look at the National Investment and Infrastructure Fund?
NIIF is a good idea. But it is very early to say how well it will work.
How disappointing is it to see GST legislation being stuck in the Parliament?
The potential of GST is quite substantial, but it is not a panacea. In all countries, things have to be done in accordance with the due process. The process is going on and we hope to see a progress soon.
How do you look at the ‘one-time’ income disclosure schemes that India has been announcing?
These types of schemes are one off and are not structural responses. The systemic aspect, which is important to bear in mind, is tax compliance. When you think of tax system, one should not think of laws and regulation but about practice of tax administration and behavior of tax payers. There needs to be a culture of trust in the tax administration and a high degree of compliance.
The government is considering a re-look at the FRBM targets and would examine the option of a range instead of a fixed target. How relevant it that according to you?
When you think of conducting fiscal policy and come up with rules and procedures, you have to take a systemic view. It is not about focusing on a number as ooposed to being flexible. There are many ways of being flexible. In terms of best practices, if you can actually do it, it is very important to have a fiscal policy that is counter cyclical. It is important to avoid pro-cyclicality in fiscal policy. We have in fiscal affairs department come up with an indicator- FISCO- that shows how fiscal policy reacts to the economy. Based on this indicator we have seen that countries that have been able to follow counter cyclical policies have generally performed considerably better in terms of macroeconomic outcomes. If you want to comment on policy options, you have to look carefully on how the alternative system can be designed. It is not a simple exercise to do. The conduct of fiscal policy is rooted in political realities; it is not an abstract exercise grounded on pure reason.
Finance Minister Arun Jaitley has decided to stick to the fiscal consolidation path for 2016-17. Do you believe the fiscal deficit target of 3.5 per cent of the GDP it is based on credible revenue estimates?
Our understanding at the IMF is that the government is well on track to do the Budget execution for 2015-16, of 3.9 per cent and 3.5 per cent for 2016-17, which, in our view, is based on realistic revenue projections. From that view point we believe that the numbers being put out are credible. One of the main benefits associated with the government persevering the budget adjustment plan is precisely to ground credibility and confidence. For a country like India, which is one of the bright spots of the global economy, grounding credibility and confidence and making fiscal policy one of the pillars of the growth and development strategy is crucial.
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Do you think India’s fiscal deficit is on the higher side? Do you see an urgency to bring it down, considering the global economic uncertainty?
If you think about the balance between expenditures and revenue in India, there is a significant gap, which for many years has been at seven per cent of the GDP. If you look at long-term, you expect this gap to significantly narrow; so the fiscal policy can perform the role of stabilising the economy and underpin the strategy of growth and development. But at this point the position of the general government is compatible with the stability of the public debt to GDP ratio. There is no immediate urgency associated with that. So there is an issue, but it is an issue that is being tackled with very gradual adjustments strategy of the government.
How do you think India can lower its fiscal deficit?
On how things will evolve from a longer term perspective, there are two aspects that are crucial to look at. They have to do with rationalization of tax system. And one very important example is that the GST. GST in the pipeline as you know is designed as a VAT and it has three very important characteristics. One, it is based on a very wide tax base and that’s why more than 150 countries around the world have adopted a form of VAT and it is a very reliable and reasonable revenue neutral source of tax revenue. Second, the GST promises to contribute quite substantially towards integration of India’s economy and so to create a huge Indian single market. That’s a very important aspect. Third, it is a competitiveness friendly tax as it allows for deductions. It is a tax particularly appropriate given India’s integration with global economy.
The government is keeping up the capital expenditure to spur growth. How important is it according to you?
It is important to improve the quality of spending. Here the example is infrastructure investment. India will be the most populous country in the world by 2030 and we need to think about rural population in India now in process of urbanisation. This growing population will have immense needs of infrastructure in this time of urbanisation. At the same time you have infrastructure gaps in water, sanitation, electricity, transport, roads or railways. There is quite a lot that needs to be done. It is not only about quantity but also about the quality. Therefore it is important to do quite a substantial upgrade in the process of governance and management of these resources. Government is indeed working towards it.
How relevant it is for India to keep up public spending, despite challenges from the fiscal front?
When you look at expenditure, it is important to recognise that In India, public and private investments are complementary in nature. A recent IMF study has documented three important findings. First, in India public investment does have a positive impact on economic growth. Second, which is more surprising and interesting is that in India, public investment crowds in private investment. It is complementary to private investment. It is not substituting for the lack of private investment, but on the contrary by boosting spending, the state is creating conditions that will allow private investment to recover. Third, when infrastructure spending is well targeted and projects are taken into completion, the impact of public investment is very favorable. Therefore, the quality of public investment management and in particular quality of implementation is very important.
How do you look at the National Investment and Infrastructure Fund?
NIIF is a good idea. But it is very early to say how well it will work.
How disappointing is it to see GST legislation being stuck in the Parliament?
The potential of GST is quite substantial, but it is not a panacea. In all countries, things have to be done in accordance with the due process. The process is going on and we hope to see a progress soon.
How do you look at the ‘one-time’ income disclosure schemes that India has been announcing?
These types of schemes are one off and are not structural responses. The systemic aspect, which is important to bear in mind, is tax compliance. When you think of tax system, one should not think of laws and regulation but about practice of tax administration and behavior of tax payers. There needs to be a culture of trust in the tax administration and a high degree of compliance.
The government is considering a re-look at the FRBM targets and would examine the option of a range instead of a fixed target. How relevant it that according to you?
When you think of conducting fiscal policy and come up with rules and procedures, you have to take a systemic view. It is not about focusing on a number as ooposed to being flexible. There are many ways of being flexible. In terms of best practices, if you can actually do it, it is very important to have a fiscal policy that is counter cyclical. It is important to avoid pro-cyclicality in fiscal policy. We have in fiscal affairs department come up with an indicator- FISCO- that shows how fiscal policy reacts to the economy. Based on this indicator we have seen that countries that have been able to follow counter cyclical policies have generally performed considerably better in terms of macroeconomic outcomes. If you want to comment on policy options, you have to look carefully on how the alternative system can be designed. It is not a simple exercise to do. The conduct of fiscal policy is rooted in political realities; it is not an abstract exercise grounded on pure reason.