Shouldn't have fiscal incentive or disincentive towards savings: DEA secy

We are moving in the direction of fiscal prudence as well as finding adequate money for priority expenditure, he says

Economic Affairs Secretary Ajay Seth, in a conversation with Ruchika Chitravanshi and Asit Ranjan Mishra, goes into the details of the Budget fine print. Edited excerpts:

From the Reserve Bank of India’s extra dividend, you had headroom of 0.4 per cent of gross domestic product (GDP), which is equally distributed between expenditure and fiscal consolidation. Is it part of a strategy?

We are moving in the direction of fiscal prudence as well as finding adequate money for priority expenditure. We have met the essential expenditure of Rs 50,000-60,000 crore, and used another Rs 50,000-60,000 crore to retire some high-cost debt and bring down the fiscal deficit. By 2025-26 we have to bring down the fiscal deficit below 4.5 per cent of GDP.

 

The Budget has announced gradually bringing down the debt to GDP ratio starting FY27 as part of its new fiscal consolidation framework. Could you elaborate on the strategy behind it? 

Instead of having a hard-wired number, this approach takes into account that an economy that is growing fast and has the potential to grow fast needs more debt and can absorb more debt while being on a sustainable debt profile. Keeping that in mind, we are confident that this current rate of growth will be sustainable in the coming years. The Indian economy would need more public investment and at the same time we would be better served if we move on a sustainable debt profile. Instead of saying that an “x” percentage of GDP shall be the fiscal deficit, which is just about the flow issue, we anchor the fiscal policy to the debt stock relative to GDP. Every year if we are bringing it down, then we are moving in the direction of a more sound position of sustainability and at the same time building some buffer in case any exigency were to arise. Now what the consolidation in each year should be depends on the circumstances closer to the year.

Will you give a target by how much the debt to GDP ratio will come down each year?

That decision will have to be taken next year. The finance minister has committed to an alternative way two years in advance, which we feel is a better way of fiscal consolidation, given our need and potential to grow faster.

What will be the strategy for further liberalising foreign direct investment (FDI) as stated in the Budget?

A company that has grown from India and grown to become a global company which is big enough to invest in several other countries and also wants to invest back in India -- how do you facilitate that process? At the moment that path is not very smooth. The second piece is, the FPI (foreign portfolio investment) limit is 10 per cent. If someone reaches that limit, he has to offload, according to guidelines of the Securities and Exchange Board of India. What if an investor holding it through the stock market route wants to convert it into FDI? That path should not be denied. But that has to go through the process of FDI approval. At the moment we have not opened that path. We have created two separate compartments. Safeguards have to be put in place.
 

There were expectations that the Budget will provide some incentive for bank savings, given the rising credit-deposit gap and the RBI governor expressing concern that it may become a structural handicap for banks.

Savings are what is not consumed. Whether the money is deposited in a bank or given as a loan or equity to somebody, both are investments in financial instruments. Should fiscal policy nudge people to a particular kind of an asset class? The thought process is “no”. That choice has to be made by the investor, the person to whom the savings belong. There should not be any fiscal incentive or disincentive towards that. So, as regards debt and equity, fiscal stance should be neutral. Personally, I would feel that gold is the most unproductive investment from the macroeconomic perspective. There are no returns. Returns are only to the individual. The fiscal stance is that all asset classes are treated equally.

Capex allocation has been kept the same as in the Interim Budget. With eight more months left this year, do you think we will be able to absorb this?

By and large in the last three years, the increase in capex was 30-35 per cent plus, and now it is about 3.4 per cent of GDP. Eight months to go, we are fairly confident that the final numbers will also be closer to whatever has been budgeted. 

On the research and development (R&D) fund of Rs 1,000 crore and interest-free loans to the states -- when will the conditions be made public on these?

As far as the Rs 1.5 trillion of interest-free long-term loans are concerned, we should expect the guidelines in about a month.

The second part is about the R&D fund, and that is a more complex exercise. Since the entry in the Budget, a number of discussions have happened with external stakeholders ... those are in a fairly advanced stage, but that may take a couple of months. 

Are you expecting a ratings upgrade after the Budget?

Our assessment is that the strength of the Indian economy is far higher than the ratings that have been given. And this has been our attempt -- to convince them (the rating agencies) about the strength of the economy. And in the last year and a half, there has been a change in the outlook towards the positive side and we do expect that maybe in the coming quarters or coming year, there should be a change in the ratings. It is for them to take a call and it is for us to convince them.