Subhash Chandra Garg , Secretary, Department of Economic Affairs, discusses implications of the various Budget proposals in an interview. Edited excerpts:
Is the fiscal deficit target of 3% by 2021 an aggressive target, because the N.K. Singh panel had recommended a deadline of 2022-23?
There is a small difference. The N.K. Singh committee said 2.5% by 2022-23. We are taking 3% by 2021. The 2.5% is not what the government considers is a desirable level of fiscal deficit in the country, so we have adopted 3%.
And we have now put a provision in the Finance Bill that this is a statutory binding target for the government. The target is 3% by 2021. So, the fiscal policy statement says that in 2019-20, we'll go to 3.1%, and in 2020-21, we'll go to 3%. But the government may aim to achieve 3% in 2019-20 itself.
That is in the future, but we are on a very solid consolidation path.
So the N.K. Singh panel’s recommendation of 2.5% fiscal deficit is not a comfortable level for the government...
We are not accepting that… 3% is the right level.
But there is a concern in the market; bond yields also shot up in early trade...
Bond yields are down. In the morning they were up, but right now they have come down. I think the bond market is realising the utmost seriousness the government attaches to fiscal consolidation. And the government is willing to bind itself through statutory rules and law. The path of 3.5% for this year was given for many months. We had already announced additional borrowings, 11 months’ revenue from GST... Next year's 3.3% is a very credible target.
Why do you say so? The Centre has undertaken a lot of expenditure next year...
Number one, we have made realistic revenue and non-tax revenue projections. The expenditure is also factored in. Almost every expenditure which is required, except the MSP-related decision and the health scheme. But, as some people would say, the disinvestment target is understated. We can do more. So, we are certain that these two expenditures can be very well accommodated or we will have some more income on the revenue side that will take care of this.
How do you plan to fund those expenditures?
The health and education cess has been increased, we have put a social welfare surcharge of 10% on customs. These two are intended to fund the health protection scheme and other expenditures on the social protection side.
What signal is the government sending to investors with long term capital gain tax? Does the bull run in the stock market bother you?
Not bothered as such but the fact of the matter is our asset prices are relatively at a higher level. P/E ratios are quite high. That might very well be, as the economic survey also said, going forward this ratios become more reasonable.
One is not concerned but one should be aware and conscious. It is not connected with LTCG has been introduced. It was introduced because there should not be any asset class which does not suffer any taxation while all other classes suffer. The equities have given good returns so they should also contribute.
Do you think the stock market is unduly worried?
I don’t think so. The market is adjusting. As the market absorbs the information there would be some effect, some volatility but nothing serious.
What will be the impact on inflation of the higher MSPs that the government announced?
Food prices indeed contributed to inflation, and the impact is more in retail inflation than in wholesale inflation.
Food prices which has a relatively lesser weight in wholesale inflation, is only at 3% while retail inflation is 5%. The difference is seen because of food prices. I think we need to know that this announcement will come into effect when the Kharif crops enter the market, which is after September and October. So, in the first six months we do not expect any impact.
However, it may have an induced effect if you think that the price of, say, pulses will go up since they are expected to get a higher price later. But I am not too concerned about that.
Do you think this could lead the RBI to change track in its monetary policy review scheduled for next week?
That’s for RBI to take a decision. RBI has a mandate.
There is a downside risk from the oil prices also?
Oil prices, the risk is if they go up and those increases are not passed on. Then it impacts the fisc. The direct impact comes from the LPG subsidy and the kerosene subsidy. It was Rs 25,000 crore for the current year, and is budgeted at Rs 29,000 crore for the next year. Kerosene is on its way out. A lot of replacement through LPG. So, the kerosene subsidy we have budgeted Rs 4,000 crore less. LPG prices are not so directly related to oil prices. So, that may not impact us as comprehensively.
What would be a comfort level in oil prices, do you feel?
It's difficult to say. Oil is an essential commidity, which we have to import for our consumption whether we are comfortable or not comfortable.
Mr. Jaitley yesterday said that we are close to the upper bound of the comfort level.
Of course! You look at it from the consumer point of view. What the Finance Minister was referring to was that at a certain level, passing on entirely the burden of the increases hurts the customers. He had made a statement in Parliament when the excise duty was increased that we are taking those measures because the prices have gone down but if they were to rise to this level again, we would consider cutting them. That's what he was referring to.
The overall perception is that you have tried to, in the Budget, help out the poor and the agricultural side, and also the corporate sector but somehow the middle class has not received anything.
Who is that middle class? It is salaried people, and it is also the small entrepreneurs. There are some measures for the salaried class, but there is much more fr the small entrepreneurs. In the Budget, you have several announcements, several measures which have been taken. We recognise now that that is the segment of the economy which is creating value, generating jobs, and therefore that segment... And the the way the global economy is changing, digital economy is coming, and the gig economy is coming, all of them make sure the value creation is done in this segment. So, whether it is on supporting the new employment by providing the employer's contribution to PF from the government or Mudra supporting lots of enterprises, that is aimed at the middle class.
Looking at FY18, there has been a large fall in the dividend revenue, profit receipts from the central public sector enterprises. Even interest income has also taken a hit when we compare budget estimate and revised estimate.
In interest income there is not much of a fall. The state government’s loans are coming down as central government has stopped giving loans to them. Dividend of course, because we have received much less from the Reserve Bank. PSU profits for example Coal India was much lesser this year. Spectrum auction also did not take place. All this factors are there, we have recognised all that.
For this year’s fiscal deficit, you had used the nominal GDP number as given by the economic survey and not by the CSO. What is the reason?
Yes, we believe that the CSO estimate is somewhat conservative. And there is a reason for that. CSO’s methodology takes into account the first 6-8 months of data. Whereas we have more dynamism in last 3-4 months, the first 6 months are more difficult months. While CSO expects a nominal GDP growth of 9.5% for FY18, we might have a nominal GDP growth of 10.5%.
