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Principal economic adviser Sanjeev Sanyal blames interest payment for fiscal deficit

Principal economic adviser Sanjeev Sanyal blames interest payment for fiscal deficit

Principal economic adviser Sanjeev Sanyal blames interest payment for fiscal deficit
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By Latha Venkatesh  Feb 4, 2019 6:25:00 AM IST (Updated)

Interim finance minister Piyush Goyal, while announcing the interim Budget on Friday, said that the government has revised fiscal deficit target for 2018-19 to 3.4 percent from the earlier 3.3 percent.

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It is true that the fiscal deficit is somewhat higher than the budgeted number and it is primarily because of interest payment," said Sanjeev Sanyal, principal economic adviser, ministry of finance.
According to him, the primary deficit is actually being kept well in control. "If you look at the primary deficit - in fact, it has done better than what had been budgeted," Sanyal said.
In an exclusive interview to CNBC-TV18, Sanyal also spoke about the revenue proposal and the farm package announced by the government, among a raft of other topics.
Watch the video here:
Edited Excerpts:
To clarify in terms of assumption of tax collection. The current year’s tax collection in FY19 budget estimate (BE), the tax revenue was assumed to grow by 19.2 percent, actually year to date it is less than 12 percent but when the revised estimate (RE) of FY19 shows an estimate of 19.5. Do you really think in the last two months the tax collection can rise by that much?
Yes, this is what the revenue department is that there is a large amount of tax buoyancy that is expected. So there is an expectation that this money will indeed come in particularly from direct taxes. So there is a fair amount of buoyancy in direct taxes that is there if you look at the budget.
Nevertheless, the borrowing programme for this year is still increased by Rs 20,000 crore that has sent the yields surging that is a bit of a worry for the bond market?
No, I don’t think it is such a large deviation. It is true that the fiscal deficit is somewhat higher than the budgeted number but on the other hand if you take wider look, the fact of the matter is not long ago we used to debate between 4.5 and 5.5 percent of GDP, nowadays we get panicked about 3.3-3.4 or 3.5 percent, so I think we have made a lot of progress.
Moreover, the most interesting point which nobody seems to be discussing is that the primary deficit is being kept well in control. So if you look at the primary deficit, in fact, it has done better than what it has been budgeted at, it is at 0.2 percent of GDP.
Essentially, there is no primary deficit really to speak of. Our fiscal deficit effectively is because of interest payments on debt accumulated over many years and one could argue that it has at least something to do with the fact that interest rates were perhaps kept somewhat higher than should have been kept.
The revenue deficit is actually going up or at least is not going down, would you worry that we shouldn’t be doing that?
I don’t think, as I said the deviations are very small compared to what we have historically been used to. It is well within what is acceptable.
Well, the historical comparison doesn’t ways work, historically the UPA did not have the advantage of $60 per barrel of crude for a better part of their term, so just doing better than them is not good enough because we have a very good macro in terms of crude prices?
Well, you have to remember that no such things like oil bonds was also floated. So in that sense, many off balance sheet debts were not accumulated in the same way.
More, generally when crude is kind to us, we should have reduced fiscal deficit, and we have not. Our fiscal deficit remains much the same for the last four years?
That is being clever by half for the simplest reason that oil prices did spike up last year and you saw that for the most part it was passed through even at that point in time you will remember there was a fair amount of political pressure to act otherwise. There was something at the margin done but for the most part, it was allowed to flow through and despite that inflation remained very well behaved. So I think you need to give credit, where credit is due.
 Let me look at capex. The extent to which capital expenditure has risen from the RE of the current year, is just 6 percent that is not very helpful when we have a lot of infrastructure to build?
That is obviously been taken into account. So you have the numbers as they are and I think capital expenditure as you have seen over the last several years have been very robust. I don’t think anybody will make the case that a dramatic expansion in airports around the country or in highway building or so on, I don’t think anybody can fault this government for not taking infrastructure seriously.
But the outlay has not been as high as one would have liked for capex. Would you say, therefore, that the thrust of this Budget is to try and boost the economy through consumption?
Certainly, there has been an effort to do two things. One is clearly that there was some support needed for the farm sector, especially since you see when you had this huge amount of decline in food inflation in some cases into negative territory, remember that is a boost to the rest of the economy in the sense that rest of the economy benefits for having cheaper food; you can think of this as some transfer of wealth from the rest of the economy to the farmer, which I think is fair enough.
They are the people who are pulling down inflation and will have consequently created the space for what I think should be structurally lower interest rates. It is a small payback to them, to allow them to go through the transition.
Coming back to the tax assumptions, this is a question which the bond markets have sent an SMS and this is what they are asking – they do worry that tax assumption of 19 percent is way above the 11.5 percent in the first nine months of the current year and of this 19 percent, next year the tax assumption is 14.9 percent. So when the  year-to-date (YTD) tax collection is less than 12 percent both these assumptions are troubling them and there is a fear that next year’s borrowing programme like this year could get revised higher, what would be your answer to the bond markets?
First of all, you have got to have some trust in what the kind of information we have based our forecast on. Also, remember that next year’s forecast is not out of whack. If you take 7 -7.5 percent GDP growth rate, which will be par for the course, take 4 percent inflation and allow for very small buoyancy in tax collections, particularly the income tax side, you would get those numbers. It does not require very complex and very ambitious forecasts to get those kinds of numbers.
Clearly a lot of people in the market are not sharing that kind of tax buoyancy but even on growth assumptions the global environment is not very kind. Most of the global agencies have marked-down global growth. In that context, growth could also have some problem in India wouldn’t it?
No, but remember we are one country where we have enormous space for reduction of interest rates in an environment where global growth is slow also you have to take the other side of it which is commodity prices will be much weaker, energy prices will be weaker, global interest rate – you have already seen that happening with US Fed take a trajectory which is much flatter. So why wouldn’t you take advantage of that. There are certain things like natural stabilisers compensating, and it happens to be that we are in a position where we can take massive benefits from that. So, why wouldn’t you allow us the benefit of that as well?
That point is very well taken and there could probably be a rate cuts perhaps in the calendar year 2019 but even then most of the bondiers I speak with believe that that may bring down the overnight rates and the near-term rates – maybe three month rates, treasury bill rates but it may only lead to steepening with the 10-year not falling much because there is so much of borrowing by the sovereign.
I am not in a position to comment on market participants, they are welcome to have their own opinion. I am just pointing out to you that you cannot take a world view where everything goes in one way there are balancing factors. So if global growth slows down, many other things also happen. You cannot have an environment of stagflation being your main assumption of the world.
Not at all when you are a 7 percent growth country. Stagnation is not even in our lexicon. Because we have got global growth slowing and commodity prices slowing and therefore we could have interest rate cuts - the argument is that that will not work in terms of lower cost of capital as there is a crowding out effect. This year, for FY20 the central government’s gross borrowing is going to be very close to Rs 6.7 trillion and plus you have state borrowing of Rs 6.5 trillion, so it is nearly Rs 13 trillion that the governments are borrowing. The worry therefore is that the cost of capital will not be cheap?
Well our economy is also growing. So it is a matter of judgment whether our financial markets and our system can take those kinds of borrowings, all we are arguing is our judgment that it can.
One ethical argument, technically it is possible that there is going to be a different finance minister, even a different party in May, was it ethical really to have force tax changes of this order on the next government. Should it not have become applicable from June 1, rather than April 1?
This is a political decision and the democratically elected government of the day has to take that decision, it is not an economics question. As far as I know, the government of the day takes a call on it and it took a certain call.
Previous times, at such occasions new taxes were always made applicable when or if we return. That is what finance ministers normally said.
If a government comes and finds any of the measures particularly objectionable then in June, July whenever a Budget is presented they can reverse it. It is not a case that it is an irreversible move. So, it so be that the new government is a different government and have different priorities they can re-prioritise. It is fair enough that the government of the day has the mandate right now to present a certain budget.
Incidentally, it did not present a full budget. It is an interim budget, maybe a little souped-up one but still it is not the case that this was a full budget. There were many things that were essentially left untouched.
It is little messy to have a to and fro on something as basic as income tax. What is the basic thrust of this budget? What is it seeking to achieve?
Basically, the idea was we have seen certain developments over the last several years. One of them was dampening of agricultural prices. So although in terms of sheer expansion and output the farmers of this country have done very well but in fact, their success itself has dampened their incomes by pushing down prices.
So a certain transfer of income was necessary because dampening down of food prices in some ways it is a subsidy by the farming sector to the rest of us. So, this was sort of payback. This was a rebalancing act that was one.
Secondly, the middle class of this country has contributed, there has been a dramatic improvement in tax compliance, they have also borne the brunt of many changes that we have made – the long-term changes like GST and so on but it did cause some amount of stress to them. So it was thought that at least the lower and middle-middle class should be also given a certain amount of relief, which I think is fair enough.
So that was basically the thrust of what was done. Other than that most things are actually left in place. It is indeed an interim budget despite maybe some political annoyance at it but the fact of the matter is most things have been left in place.
You are one of the earliest economist to point out that we have a surplus in agriculture and one needs to look at agriculture differently, I remember you saying that in an interview much earlier. Instead of investing more in construction or infrastructure and sucking away that labour, providing it an alternative occupation asking them to stay on there and giving them an income doesn’t seem like a good idea. That money has been given to them --your capex is 6 percent that is not good, barely meets inflation?
No, I think this is the wrong way to think about it. Clearly, we do want the rest of the economy to grow. Ofcourse, we want the construction sector, services and other sectors to continuously grow. We continue to expect urbanisation. I don’t think a benefit of Rs 6,000 a year fundamentally changes the dynamics of that. What it does do is provide some amount of supplemental income to farmers who clearly would have felt the problem of dampened prices at the margin.
It is the case that they have produced more food or whatever agriculture produce they were doing, even non-foods. So, this is just to top it up and in some ways, this is fair because the rest of us are benefiting from very cheap food. Not so long ago we used to have this spikes in onion prices causing middle class angst and so on. That has suddenly become a matter of the past.
So, think of this as a top-up to the farmers and somebody did have to pay for it and it happens to be the farmer, this is a payback to them.
I am not grudging that just that it is not going to the landless labour, it is not going to the tenant farmer, it is going to the guys who have land – it does not seem all that fair?
Nobody is saying this is one-time and solves every problem in rural India. Nobody has made that claim, I don’t think the FM has made that claim. This is a transfer to the rural sector of a certain kind. Now hopefully there will be some multiplier effect from it, from people spending and so on but even then no claim is being made that every problem in rural India has suddenly been sorted out as a result of this.
We continue to require the rest of the economy to do well. We still need to think have- our vision was painted out as well towards 2030. That does include keeping the economy running at a high rate, keeping job creation going and many other things. It certainly isn’t the case that the attempt was oh! We need to keep our farmers back in the villages doing whatever they are doing for over a time to come.
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