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FM may change fiscal deficit target if needed: Panagariya

The Economic Survey 2014-15 indicated that India is in a sweet spot and there is scope for big bang reforms. The government flagship document which was tabled in the Parliament today by Finance Minister Arun Jaitley highlighted the fact that the growth engine is set to start firing and aache din will soon be here. Speaking to CNBC-TV18, Arvind Panagariya, VC, Niti Aayog, said the FM can take the liberty to change the fiscal deficit target if needed in the Union Budget tomorrow.

The survey forecasted a gross domestic product (GDP) growth between 8.1-8.5 percent for FY16, which, according to Panagariya, the country needs to achieve soon. He believes tax realisation a must to increase investments in India.

The increase in states’ share in central taxes to 42 percent by the 14th Finance Commission is a positive move, believes Panagariya.

Meanwhile, he also said that the Reserve Bank of India must continue cutting rates.

Below is verbatim transcript of the interview:

Q: There is a great reiteration of fiscal discipline in the medium-term of 3 percent but I did not anywhere explicitly see the commitment to 3.6 percent as a first step. What is your own sense that we can take some liberties initially?

A: We’ll have to wait and see, within 24 hours we will know what liberties we take or we do not take. It will be premature for me to speculate on where the deficit is going to end.

Q: I am not asking you to outguess but I am just asking as a view will it be okay to renege by a few bps in the first year?

A: This is an issue that can the transmission be different. I certainly do not think that the finance minister will take so much liberty that from 4.1 he goes to 4.4 or 4.5. The road should be towards 3 so the next one should be 4.1 or less but can we take some liberty? 3.6 was decided under one set of circumstances and if the finance minister feels that today the circumstances are not quite what they were at the time the 3.6 target was chosen, by all means he can change it.

Q: How would the international community view this if we were to renege? We had forecast 4.1 percent and 3.6 percent at very different crude prices of USD 100 and USD 115 per barrel levels. Now our subsidies have reduced from 2.1 percent of the GDP to 1.4 percent. Under such circumstances to renege on fiscal discipline, will not the rating agencies look have issues?

A: I have always maintained and have spoken to a lot of rating agencies; not as many as you have been or as frequently as you do but they all say that that they never do the ratings base on a single issue meaning the fiscal deficit. They see the Budget as a package which is number one.

Two, You have certainly made some favourable points like developments that have happened but on the other hand do not forget that there is another side to the context which is that the 14th finance commission has recommended a 42 percent devolution of the divisible pool to the states. So, that automatically does limit the fiscal space for the Central government.

In that context there is a 10 percentage point jump compared to what it was. The government is not complaining and I was very pleased that the Prime Minister has stuck to his cooperative federalism theme and is very pleased with that. That being said, for the finance minister that makes a tougher act actually because the fiscal space is that much reduced.

Q: Lesser mortals like journalists can make this comparison of 32 and 42 percent. You know those numbers too well. The original number was never really 32 percent, it was the mandatory transfer. The centre was anyway transferring something like 39-39.5 percent at least. The difference really is 3 or 4 percent points. Is that argument enough? How much money is coming less?

A: No, you are comparing 32 and 42 and then there are other grants that in this case will also go on top, which is for the revenue deficit grants, the local body grants, disaster management grants. These are all going to be on top of the 42 percent.

The way the finance commission saw it was that this central government ought to trim down as desired also be the states the centrally sponsored schemes and other central schemes. But I know social expenditure schemes particularly related to the poor are not that easy to cut. So, there is an act that the finance minister will need to perform. What does he do with centrally sponsored schemes? Some of these even got legislated.

You have NREGA which has to be done. That is by legislation. Public distribution system (PDS) that is not a centrally sponsored scheme, but nevertheless that is a programme to which the government is committed by legislation. Sarva Shiksha Abhiyan (SSA), there is a commitment and so some of these cannot be cut. This 42 percent actually has real implications.

Q: Yes it has but SSA is not legislated, likewise the National Rural Health Mission (NRHM) is not and they can always be devolved.

A: No, under right to education you can’t devolve. You think any state will say that I am very nice and I am going to take over the expenditure of NREGA. They are going to say that this is your central scheme, so, it is your obligation and not mine. The Centre is not going to act, so irresponsible as to just let go off NREGA and count on this goodness of the states to undertake it.

Q: I would still have a couple of arguments that the finance commission has been constraining the Centre from meeting fiscal targets. The very same finance commission has ordained 3.6 and 3 percent.

A: That was under very different set of assumptions on tax revenues. Tax revenues have ended up being far lower than what the finance commission assumed in those reports and so, you are back to that same issue.

Q: What about the extent to which the survey extol this 8.1 percent and 8.50 percent growth? If growth is indeed 8.1 to 8.50 percent is there any argument for a fiscal stimulus?

A: Latest figure I have seen is 7.4 percent.

Q: For the current year it is the 7.4 percent but the forecast for FY16 is 8.1 – 8.50 percent.

A: That forecast is probably contingent on something. You cannot do the forecast just based on nothing so maybe the forecast does assume some small bit of fiscal stimulus. I do not know we have to read the survey carefully. I have had as much time as you did. You can not take the forecast and ask me the question about fiscal stimulus on that basis.

Q: Will 7.4 percent also be a little difficult to argue that fiscal stimulus is needle?

A: You post the question can you deviate from 3.6 and my argument was that as long as they do not deviate too much, the journey so your room is between 4.1 and 3.6 take your pick. That is all I am saying.

There is still an issue of infrastructure building –their need is well identified that infrastructure needs to be built up and for that you do actually go in and choose a target different from 3.6 but below 4.1 percent.

Q: The argument against fiscal stimulus of a large degree also comes from the international experience after the global financial crisis. A lot of emerging markets tried to do fiscal stimulus and regretted it and we know the sad case in China where stimulus went to as much as 12 percent of GDP. Even in India we are living to regret the kind of profligacy that we indulged in post 2008. Historically and across continents the argument is not very clear that fiscal stimulus has worked?

A: We are not talking large numbers; the fiscal stimulus that the Americans tried was very large and what the Europeans are trying is a very large one, too. Here we are talking of cutting deficit from 4.1 to either 3.6 or something between 4.1-3.6 it is not a large issue. That has nothing to do with what we are talking about in terms of the fiscal deficit for the next year.

Q: What is your sense in terms of interest rates coming down and that giving growth a kicker, what in your own estimate is the likely growth for next year and how much stimulus the monetary authority ca give?

A: I will not commit to any number. The question is that should the monetary authority let the interest rate go down? Yes. In the next round should it let it go down more than 0.25 percentage points? You bet. How far? That I will leave for the RBI governor to decide.

Q: Would you buy in that 8.1-8.5 percent forecast for next year?

A: I am an optimist always. So, if we are 7.4 percent already, yes we ought to go to 8-8.5 percent at least. So, certainly given the fact that as measured by the CSO 7.4 percent was already there for the year 2014-15 and even 2013-14 was not bad – 6.9 percent. So, we are on a rising trajectory and we ought to get there between 8 and 9 percent.

Q: What is your estimate in terms of our ability to control expenditure through this JAM trinity that the survey talks about Jan Dhan, Aadhar and Mobile, any details that you can add in terms of the ability to control seepages and how much we may be able to save?

A: I don’t know the numbers, I think survey does give some numbers. All of us have complained about massive leakages that happen and these are large programmes, think of the PDS very large leakages, NREGA – large leakages. So I think scope is very significant, substantial scope is there.

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