chief economic adviser Krishnamurthy Subramanian said. In an interview with ET, he said the fiscal policy should be counter-cyclical.
The Economic Survey called for fiscal relaxation. Does the budget go far enough in that direction?
The survey has called for counter-cyclical fiscal policy, not for fiscal irresponsibility, and actually, it’s underlined. The budget, not only on fiscal side, is a far-reaching one as it lays out the ingredients for sustaining the recovery into the coming year as also laying the foundation for high growth over this decade.
Firstly, infrastructure spending. In the second half of the year, the two months remaining, we have spent the entire budget estimate and we top it by about 4%. In FY22, we are increasing by almost 34%. So… both in terms of percentage of GDP and actual rupees spent, this is the highest public capital expenditure ever. Second, healthcare spend. It affects productivity of labour and labour supply. There is almost 135% increase in the healthcare spend. Third, this budget might go down as one of the seminal ones in terms of financial sector reforms – the privatisation of public sector banks, the DFI (development financial institution), bad bank, higher FDI in insurance and the public sector enterprise policy.
If you contrast the Asian financial crisis versus the global financial crisis, after the global financial crisis, we only did revenue expenditure. We, in fact, shrank capital expenditure and there were no reforms. Demand increased because of the revenue expenditure, but neither capex happened nor reforms. As a result, the supply did not respond. When you have demand increasing without a supply side response, runaway inflation is what you get. And that is what indeed happened. In contrast, after the Asian financial crisis, capital expenditure increased significantly and reforms were done. As a result, both demand and supply increased and that is why we got growth of 8%+ from 2003 onwards without inflation. This is what we’ve done now, but on a much higher scale.
The budget talks about a new fiscal framework. So, are we moving away from a fixed target?
We have to understand the difference between pro-cyclical and counter-cyclical fiscal policy. Any economy has oscillations – there are ups and downs. When fiscal policy is pro-cyclical, it actually exacerbates those troughs. When fiscal policy is counter cyclical, it mitigates those peaks and troughs. When the peaks and troughs are mitigated, macroeconomic uncertainty goes down, which is extremely important for investment to happen from the private sector.
Counter-cyclical fiscal policy creates expectations in the same way as inflation-targeting creates expectations of inflation. India’s fiscal policy has not been counter-cyclical. Other countries follow them religiously. Details can be worked out and can and will be worked out. But the essential principle has to be that fiscal rules have to enable counter-cyclical fiscal policy, not make it pro-cyclical.
You have a whole chapter on ratings agencies. Some private economists have expressed concerns about a downgrade. Have you reached out to them?
Of course. There is engagement not only with ratings agencies, but with other international agencies as well. It is a continual one. We have made all the economic arguments. Economic rationale is very strong. Compared to the beginning of pandemic, we are in a stronger position. In the budget, we’ve provided for growth and a chapter in the survey makes it very clear growth leads to debt sustainability.
On growth estimates, is the government being conservative or is the Economic Survey more bullish?
The thought has been primarily to under-promise and over-deliver. It’s quite likely that our fiscal deficit will be lower than what has been mentioned. When you under-promise and over-deliver, it generates enormous credibility.
Given this strong emphasis on growth, can India tolerate slightly higher inflation?
The policies that we’ve implemented, working on both supply and demand, follow the template that we had after the Asian financial crisis – focusing on reforms, focusing on capital expenditure. So you have both – an increase in aggregate demand and increasing aggregate supply, which can enable growth without having to have a situation of high inflation.
One likely disruption that is out there is financial markets being out of sync with fundamentals. How do you see it?
If you look at the post-budget market response, that is not a disconnect. That is actually reflecting the fundamentals because stock markets basically reflect future growth. The budget creates not only the prospect for growth in the coming year but also lays out important foundation for future years. The post-budget rally is reflecting what we’ve clearly highlighted in the survey, that India has actually shown its maturity in its policymaking. Policymaking can often be myopic. In contrast, in responding to Covid-19, India has actually been mature – taking some short-term pain for long-term gain.
Whether it’s the Covid management or demand-supply policies, reforms, people are putting their money where their mouth is. There is no question that there is liquidity, especially given the fiscal and the monetary part, but at the same time investors finally put their money where their mouth is. There is global liquidity that is looking for returns and India now I think offers that high return.
Many private economists have spoken about a K-shaped recovery, with only select sections of the economy growing. There is criticism that the budget has not done much for stressed sectors.
I have two responses to this. Firstly, if you will recall on the 31st of August, when the Q1 GDP numbers came, when we spoke about the V-shaped recovery in macro-economic indicators, that V-shaped recovery itself was doubted almost across the board. Now, we are glad that has actually transpired. Second, the part that I have already said is that compared to revenue expenditure, capital expenditure creates a lot more sustained increase in demand and supply. For instance, take the vaccination programme. I’ve said this before – vaccination can be a vaccine for the economy, especially to the services sector. Because once people get vaccinated, they can travel, do some of the contact-based services that they have been avoiding. That will really bring back the aggregate demand. Finally, economics is all about how to do the best with scarce resources. When you actually have, let’s say, ₹100 to invest and have two choices, one, which is basically where you invest ₹100 and get ₹98 from it, and another where you invest ₹100 and you get ₹245 in that year and ₹450 over the lifetime of that investment. For our personal investment, we’ll obviously choose the latter. It’s the same fiduciary responsibility to basically treat the taxpayers’ money as our own and do the same thing. That is what the fiduciary responsibility and that’s what Dharma also is. That’s what has been done.