Budget opted for lasting benefits, not temporary relief: TV Somanathan

I still hold the view that except for the poor, what is restraining consumption is activity restriction, which is not financial in its origin, says finance secretary

The FY23 Budget’s nominal GDP assumptions factor in an expectation that the deflator will show a ‘reversal to the mean’ in the coming year, finance secretary TV Somanathan told Arup Roychoudhury and Asit Ranjan Mishra. In a freewheeling interaction, Somanathan said that because of interest rate increases, the government was not expecting NSSF contributions in FY23 to be as much as FY22. He added that consumption will bounce back once the pandemic-related local restrictions are behind us. Edited excerpts:

What has been the deflator assumption behind your nominal GDP growth target for FY23?

The ministry’s economists have estimated 8-8.5 per cent growth. The GDP deflator is not the same as CPI inflation and we have to remember this as it is often forgotten. This year, for example, the GDP deflator is a huge number; it is some 8.4 per cent, much higher than the CPI. Typically, there is what is called reversion to the mean. That is, if WPI is very high this year, and higher than CPI, then it usually tends to be lower than CPI next year. It doesn’t always happen. But it’s a reasonable assumption. So, if we have a reversion of the GDP deflator, next year it could be lower than CPI. On that basis, it could be 8+3, 8+4 (8 here denotes the real GDP growth projection). That’s between 11 and 12 per cent, nominal reach. So, that is one assumption on which we have reached our nominal GDP estimates.

What has been the philosophy of the Budget this year?

Philosophy is to give a big push to jobs through recreating productive growth and create gainful employment, for which you need activity to restart. And, to do it in a way that improves future productive capacity. That is why the thrust on capital expenditure. And, to do this while also fiscally consolidating in a gradual manner. These two parts encapsulate the philosophy. The good thing about capital expenditure is it is demand in the short run. It enhances productivity and productive capacity in the long run, which is supply. So, I think there is a lot in it for demand. But for a country like India, we have to increase our productive capacity for which supply will always be a priority. We are not the United States where the problem is only demand. We have to keep growing. We need more roads, we need more railways and we need more hospitals. It will always be a balance of supply and demand in Indian conditions.

The criticism has been that the Budget has not done much to boost consumption

I still hold the view that except for the poor, what is restraining consumption is activity restriction, which is not financial in its origin. It is a fact that there is a curfew on Saturdays and Sundays or that half the shops are closed, or you cannot go after nine o'clock. I mean, these restrictions cannot be solved by government intervention. The government can take care of the vulnerable and the poor. That it will continue to do. But demand and consumption will be driven more by non-financial factors. They are restrictions stemming from the health situation. When those are lifted, I think you will see a consumption growth,

What about job creation?

So, this Budget’s approach is to create jobs. Basically, you have investments in roads, railways, telecom and state projects along with investment in Pradhan Mantri Gram Sadak Yojana, which is up by 27 per cent. Now, those are actual productive assets being created with real gainful employment being created with that. It will benefit the poor in terms of job creation and also the middle class. We have opted for a strategy, which gives people lasting benefits rather than a temporary relief.

Every year, the government increases capex and says that it will crowd in private investment. Private investment has not yet picked up. What would be your message to India Inc?

I am not a person who believes that India Inc will listen to messages from me. I think it will listen to messages from the markets and investors. If it sees productive capital investment opportunities, it will make capital investments. Right now, it is probably constrained by capacity utilisation not being full. The only thing that I can tell India Inc is I can give it some information. Beyond that, it has to make its own decisions. What I can do to make it want to invest is to show clearly that the government will follow a prudent economic path. This is a government that is consistent. We have said we will increase capital expenditure and we have increased it for two years in a row. We intend to create the infrastructure of a modern India by 2047. We are also showing that while we are doing this investment now, we are going to be fiscally prudent. In the long run, we will not be driving up interest rates to astronomical levels. We will be following a prudent path, and therefore, funds will continue to be affordable. The other investments that are being suggested in the Budget, not necessarily financial, are modern technologies and green technologies. Policies as well as funds have been given in areas that also creates a lot of demand potential for the future. So, all this together, my message to it would be this may be a good time for you to invest. Take us very seriously.

From RE FY22 to BE FY23, there has been a reduction in fertilizer subsidy. We saw this year, government increasing fertilizer subsidy because of global factors. 

These are very difficult estimates to predict in advance, they are very volatile. It depends on global commodity prices. And it depends on commodity prices, which will prevail in the coming year, which as you know, the best commodity analysts are usually wrong. When they say $100 oil, it goes to $60; when they say $60, it goes to $200. So I am not superior to them. I mean, I know even less than they know and they don't know much. So in this situation, we have to make reasonable estimates. It's a good principle to look at the past and make some reasonable estimate. So what is provided for fertiliser reflects a possibility of prices being more moderate in the coming financial year. If it doesn't materialize, yes, it may have an effect on what is to be provided.

The sharp increase in borrowings, accompanied by an expected reduction in drawdowns from NSSF, has spooked the markets.

Last year's budget estimate for the deficit was Rs 15.06 trillion. And the net market borrowing BE was Rs 9.67 trillion. This year, the deficit BE has gone up from Rs 15.06 trillion to Rs 16.61 trillion. The market borrowing has gone up slightly more than that. It's gone from Rs 9.67 trillion to Rs 11.58 trillion. It's not as if there is some fundamental shift from the last year's budget. In the revised estimates this year, small savings accruals have been much higher than budgeted. Now, we don't know what will happen next year with rising yields and rising deposit rates. Will we get the same inflows of small savings? We don't know. So, we have done our estimation and that is the reason for these numbers. The numbers are constructed on this basis and they are transparently given.

We are assuming a reduction in small savings primary because now when the deposit rates start rising, it is possible that accruals of small savings will not be as high as this year and it will revert to its previous trend, which is more in the Rs 4-4.5 trillion range, which is what we have estimated for FY23.