Union Finance Secretary TV Somanathan on Thursday said India is relatively better placed, economically, compared to other countries, but cautioned that the country cannot be immune to geopolitical challenges as India is part of the global economy. Somananathan was referring to the ongoing conflict in Ukraine, which has already had a huge impact on oil & gas, fertilisers, and cereals.
Here are edited excerpts from Somanathan's exclusive interview with CNBC-TV18's Sapna Das.
Q: Post-Ukraine, everybody is grappling with the after-effects and ongoing effects. What is your assessment of the Indian situation right now?
A: Russia-Ukraine is a big conflict. It has major repercussions for the whole world including in terms of energy supplies, fertiliser supplies, and the price of agricultural commodities. The disruptions that this conflict has brought about do have their effects on important sectors for India. India is a major oil importer so the effect on oil prices is certainly going to be felt here. We are dependent on imported fertiliser to a considerable extent, so that is another impact. Of course there is the impact on the global food situation which for India is positive as we are a foodgrain-surplus country. So it has big impact for the Indian economy — some are negative while some are positive. However overall India is in a relatively stronger position than many other countries.
Q: So crude and fertiliser are big red flags at the moment. What is the assessment there in terms of what kind of balancing is required and where do we stand at the moment? How do you see the next 2-3 months?
A: I am not somebody who puts much faith in price predictions and technical analysis on global oil prices because those are very difficult to predict. The best predictors often go wrong. We know what's already happened. We know that fertilizer prices are high, we know that fertilizer prices are difficult but the government has already announced its fertilizer subsidy for the upcoming season and that will certainly have a big fiscal impact. So there is going to be a substantial increase in the budget for fertilizer subsidy, which will go up —in excess of Rs 2 lakh crore. So that's a big budgetary impact.
On oil, I think prices are high. But they have not climbed much in the last month. So we have to see how this evolves. I mean, will things get worse if sanctions are tightened in Europe? Or will it get better because alternative sources of supply open up if say something happens in Iran or Venezuela or if US shale oil begins to expand production and so on.
Q: So two issues here — one is the horizontal line in terms of pricing, and also the alternatives that we are talking about. But those alternatives will take a period of time to develop. So immediately if you look at it there is pressure. The crude is continuously above $100 per barrel, but the retail prices have not moved at all for a month now.
A: If you look at the last 30 to 40 days, the trend line of crude prices is actually flat. So yes, there have been days when it's high and days when it's low, but we are not very different from the trend average price that we had when these increases were made. So I think we are still in the same broad zone that we were in about a month ago.
Q: Could that be one of the reasons why the retail prices have not really been increased?
A: If you look at the numbers, there have been days when it's gone up, suddenly, there have been days when it's crashed. So perhaps that is a factor. But I am not privy to the exact pricing decisions that the oil marketing companies are taking.
Q: Just one more quick one on this — consequential impact on the under-recoveries of OMCs. There hasn't been any clarity on that so far. So any thoughts, if you could share any assessment?
A: I think prices did move up over a period of time, after which, I'm not sure that there's any significant change in under- or over-recoveries after that price change for the same reason — if you look at the crude oil price chart over the last five weeks, you will actually see something very close to a horizontal trend.
Q: The chief economic adviser had shared with CNBC-TV18 that if crude continues to be around $110 per barrel for, say a quarter, maybe some changes in our economic policy, or rather the way we look at things and assess them, may be required. Is it too early to ask this right now? Are we still there?
A: No. In terms of fiscal policy, I am not currently seeing the need for any fundamental changes in our fiscal approach.
Q: There has always been the expectation that maybe the government should again lower excise. Do you think there's a case right now or not really, it's too early?
A: I don't want to speculate on tax matters. I will say that there is no quick fix in these. I mean, sometimes it is quite possible to underestimate the secondary consequences of some of these decisions. So a change in excise duties affects retail price, but it also affects tax revenue. So if government's tax revenues go down, and the fiscal deficit goes up, what do you do with that fiscal deficit? The funding has to come from somewhere. So if you were to do a tax change, would it imply a reduction in government capital expenditure? Is that desirable? I am not sure as that has growth effects. If there's no reduction in government capital expenditure, or in some other expenditure, then the higher deficit has to be funded. If it's funded by additional market borrowing, does it have an impact on interest rates? And if it has an impact on interest rates, does that affect growth? If that affects growth, then how different is it from an increase in interest rates without changing the excise duty? So it's a complex equation, in which any decision that the government takes has to factor in the second order, third order effects.
Q: Last year you could take this decision maybe because the macroeconomic factors were not so challenging.
A: The fiscal situation was less challenging.
Q: You just mentioned the fiscal situation was less challenging, so one as you mentioned the crude oil — one is that part, the second of course is fertilisers that you mentioned, what can be the other challenges on your fiscal policy going forward? Also, I just want to ask you in the context of RBI withdrawing its monetary stimulus that has already started, does it also limits your fiscal space?
A: I think the institutional arrangements in India are pretty clear and they are robust. So the Reserve Bank and its Monetary Policy Committee take the primary set of decisions on inflation control, and they have taken their decisions and the government respects that. So I don't see a direct correlation between what they have done and what should then happen on fiscal policy.
I think, they have done what was necessary. We will continue to do what has to be done on the fiscal side, in terms of managing the economy, managing growth, keeping up capital expenditure, and doing whatever we can to keep inflation under control. But that's a separate set of measures not necessarily linked to what the Reserve Bank has to do.
Q: So is the government thinking anything along those lines? Or is it a bit early at the moment?
A: As I said earlier, I think we are sticking broadly to the fiscal approach that was outlined in the Budget.
Q: Which is basically? If you could reiterate.
A: Enhanced capital expenditure as a stimulus to long term growth prospects and we have not deviated from that.
Q: This is despite the fact that the withdrawal of the monetary stimulus has started, but you are going to stick to your capex numbers?
Q: So going forward, how challenging do you see the environment? I mean if you look at rupee, it's touching all-time lows every day, there is crude, of course, we have discussed its impact, inflation is very high at the moment, it could go up even further, there is also a short term, so called power crisis at the moment. So things overall are looking very challenging. What is the assessment? How do you navigate in this kind of weather?
A: Weather is a very appropriate term because we have no control over weather. We are in very adverse weather because of factors beyond India's control. We are part of a global economy, we cannot remain immune to large forces that we have no control over. So many of the factors that you referred to, whether it's inflation, exchange rate, if you look at India in isolation and forget the weather then it looks in a particular way. But if you look at what's happening in other countries, look at what's the rate of inflation in many developed countries, if you look at what's the rate of inflation in other emerging markets, if you look at what's the situation of many other currencies, in that context, India is actually in relative terms well positioned. And I think it's important for people, market participants as well as general citizens to realise that it is that global environment in which the Indian economy has to be looked at and looked at through that prism. I would very humbly suggest that we're actually doing relatively well.
Q: You also mentioned that fiscal space is constrained this year, apart from what we have discussed what else is there that basically restricts your envelope?
A: The big ones are the known ones, I mean, the effect of fertilizer, then there's been an extension of PM Garib Kalyan Anna Yojana, those are the known ones. But we're only in the second month of the year, so there could be other emerging expenditure contingencies which I am not aware of. But I cannot rule something out over a 12 month horizon when I am in month two.
On the other hand, I think there is a very high likelihood that our tax revenues will be higher than budgeted based on the high numbers that we've seen in the last couple of months and the fact that the revised estimates have been exceeded in the financial year 2021-2022. So in terms of the net fiscal position, we're not very different from where we were on February 1. And I don't believe in giving very speculative numbers when I don't have a basis to do so. So I think that's probably all that I can say.
Q: Also, there has been a lot of chat about bond yields going up bond yields going down. Is the government really very much concerned on that?
A: Bond yields going up increases the cost for the government on its incremental borrowing. Now, you must realise the government is not a bond trader, so we don't hold the stock of bonds. Yields affect the government on incremental borrowing for the year. So of course, higher bond yields mean higher cost in terms of interest payments, not only this year, but in future years when these bonds issued this year need to be serviced. But at the same time, we don't see bond yields as something to be managed from that point of view. I think bond yields are a factor of prevailing interest rates, they have to respond to emerging interest rates in the economy and interest rates are an important tool in the management of inflation, in the management of other macro-economic variables and that's an instrument that is primarily to be managed by the central bank.
Q: So that answers the thing that there have been reports, people have been saying that maybe government is in conversation with RBI to try and manage the yields.
A: The government is in constant conversation with the RBI at all times — good times, bad times, normal times, abnormal times and the RBI is the government's debt manager, that's the institutional arrangement. So that is a routine conversation that goes on all the time in terms of how best to manage our borrowing activity, but it is not as if the government has said anything to the RBI about how to manage yields. That's not correct.
Q: Going forward, there will be further rate hikes, further decisions to be taken by a Reserve Bank of India looking at the inflation situation, that's really going to impact demand. And I suppose that's one of their key objectives as well — in order to tackle inflation, you kill demand. Globally also I think other central banks will follow that. So, I mean, is it a catch-22 for India as well, because we are yet to recover from the COVID impact and here we stand in terms of this kind of inflation, pressure, interest rates going up very steeply over the next six odd months. How do you look at it?
A: When interest rates go up, demand is expected to moderate and that's part of the reason for increasing interest rates. But in India's case, what is likely to happen is a moderation of our otherwise high growth rate into a slightly less high growth rate. But I think we will still be one of the fastest growing economies in the world, despite the effect of the moderation of demand that you have referred to which will happen, but I think we will still be relatively a fast growing country.
As I said, on the fiscal side, our capital expenditure programme remains unchanged. So, we are not cutting back on capital expenditure, we have not asked any ministry to go slow on capital. In fact, we continue to be committed to the capital expenditure programme that the government announced in the Budget. Yes, there could be some demand effects through the interest rate changes and that is part of the inflation containment strategy.
Q: That will also at some point impact the capex cycle in terms of the borrowing?
A: It may or it may not because we have not seen capex grow very fast when interest rates were very low. So, frankly, this correlation between private sector capital expenditure and interest rates is a very tenuous one. It exists in theory but the interest rate has to be measured against the expected returns on the investment, the animal spirits and whether the economy is expected to grow. I think India's growth prospects remain very robust in the long run, especially relative to most other investment destinations.
Q: So two quick questions, an important one on GST — the guaranteed compensation period sunsets very soon. do you expect the road forward to be smooth, because revenues are very robust right now or do you expect some disruption, some small challenges, maybe some states may need compensation, any assessment on the part of the government on this or anything that you can share with us at the moment, which could be material?
A: It's a fact that the period of five years which was envisaged in the constitutional amendment, and in the legislation that followed, it ends in July 2022, which is two and a half months away, that's a fact and that is the legal position. So there is no legal provision for compensation beyond that. What has to happen beyond that is a matter for the GST Council to take a decision on — they have already initiated a number of actions, there are discussions going on, on rate rationalizations on looking at how best to augment revenues through better administrative measures, and so on.
The second thing is that revenues have already shown a substantially higher trajectory, you have seen what the latest collections were. I mean, that's almost a 67 pecent increase over the last two-and-a-half years, if you look at that monthly number. So that's encouraging. That doesn't mean that there will be no issues whatsoever, there will be some states where the growth in spite of this growth, the revenue expected in the current financial year may not be much higher, or even maybe lower than in the last financial year when compared with compensation. So it's not as if the revenue this year will be lower than last. It'll definitely be higher for everyone. But will it be higher than the revenue that they got last year, including compensation and including the back to back loans? That is the challenge.
Q: LIC IPO has closed and you kept a smaller size than what was anticipated earlier. Going forward. How do you see the disinvestment story in the rest of the financial year? From a macro-economic point of view. It’s a challenging year. So how do you see that panning out? Do you see other transactions also coming up?
A: I think, after the Budget, I had interactions with the media and I think my colleague Tuhin Pandey did the same and we have been pointing out that there is a change in our approach towards disinvestment, towards raising of resources through disinvestment, which is that we no longer look at as a means of plugging the Budget deficit or plugging the gap in the resources. We look at it as a means of achieving certain economic objectives in terms of improving economic efficiency, getting better results from existing assets and so on. So, in that sense, I think we have achieved the objective of taking LIC public, I think it's a big success.
So, I think it shows an improved capacity to manage these issues on the part of the government, which I see as a long-term positive. In terms of what is yet to come, the Budget estimate was Rs 65,000 crore — the Rs 21,000 crore of LIC was not part of this and as of today, I don't see any reason why we shouldn't achieve the Budget estimate plus Rs 21,000 crore. It's still very much on the cards, there are transactions that are very feasible over the coming year.
Q: Would you like to mention them?
Q: That has not moved at all for a year-and-a-half.
A: That may be your impression, but maybe it will move. There are transactions that I think you know, even better than I do. And there are 10 months to go in this financial year. That's a long time.