Fiscal Slippage For A Second Year Would Be Unconscionable, Says NIPFP’s Rathin Roy
The Narendra Modi led administration will present its final budgetary document on Feb.1, when it delivers the interim budget before heading into elections.
The government and Finance Minister Arun Jaitley saw some early success in bringing down the fiscal deficit, even though they slipped on the deficit target in FY18. For FY19, the target of 3.3 percent of GDP looks like a tough ask. There are other structural issues, too, which have re-emerged. Such as the reduced focus on bringing down revenue deficits and an increased reliance on borrowings from the National Small Savings Fund.
BloombergQuint spoke to Rathin Roy, Director of the National Institute of Public Finance and Policy on the government’s fiscal performance over the last five years. Edited excerpts of the interview below:
On Fiscal Deficit & Revenue Deficit
What has this government done right and what has it done wrong in terms of fiscal management?
What they have done right is that they stuck to the path of fiscal consolidation, understanding that such fiscal consolidation is essential for the central government to continue working as an effective going concern. And that such fiscal consolidation, because it is a percentage of GDP, as long as GDP growth is high, does not necessarily involve austerity.
If your GDP is growing at 11-12% in nominal terms, and everything else remaining the same, it means that your public expenditure can go up by 11-12 percent in nominal terms a year. To the extent you increase tax revenues or decelerate expenditure growth, you can improve your fiscal deficit. I think that it something the government has done well and strategically.
I would like to point out that the government took a very brave decision when it came in. At the time, petrol prices were falling. The government could have passed on that benefit to consumers but it took a progressive decision that reducing petrol taxes was not going to help the economy in terms of inclusive growth. They, therefore, kept those taxes up and that helped a lot in executing fiscal consolidation.
There has been slippage in the last two years. On FY18, the slippage was explained away as a consequence of GST. But even in FY19, it doesn’t look like meeting a fiscal deficit target of 3.3 percent of GDP will be easy.
On FY18, the slippage was partially avoidable. Slippage happened because revenue expenditure was not kept under control. Therefore, over a 100 percent of the slippage was due to the revenue deficit which is borrowing for consumption. It was not due to increased public investment. In fact, public investment declined.
Just to give you a number, when this administration came to power, they managed to reduce the ratio of revenue deficit to fiscal deficit from 72 percent to 59 percent. When the slippage happened, we were back to 72 percent. What you effectively had was a lowering of the fiscal deficit but revenue deficit as a proportion of that stays where it was. That I think is a sign of concerning fiscal weakness which will need to be tackled going forward.
It doesn’t look there is an attempt to correct that balance. In fact, in the medium term fiscal statement last year, the government said it would not target revenue deficit at all.
The medium term fiscal framework, with due respect, is not a document to which I would give any analytical credence. We need to get serious about medium term frameworks and that will only happen when we have a proper medium term budget and not some add-on gestural lip-service to the recommendations of many fiscal authorities including three previous finance commissions.
The dropping of the revenue deficit target, as a matter of policy, I think is wrong. I think it is also facile. Because it can be calculated and it will be out there within 48 hours of the budget being presented. It is not rocket science.
So I have no idea why there is this ‘ostrich-like’ attitude to a central problem in the fisc. I hope that decision will reverse and we will continue to monitor the revenue deficit.
This is a structural trend. We began borrowing for consumption in 1980-81. At that time, for every one rupee we borrowed, 4 percent was borrowed for revenue expenditure and 96 percent was borrowed for capital. That number peaked at 81 paise borrowed for consumption in 2008-09 and then this government brought it down to 59 paise. But you can see how fragile that ratio is. A small fiscal slippage took that ratio back from 59 paise to 72 paise again.
How can a government argue this doesn’t matter? It is also not about BJP or Congress. It is a bipartisan problem that has been growing. We need to address it.
Can you highlight your view on what is counted as revenue expenditure and what is counted as capital expenditure.
This has become a fashion across all governments. So let me explain this.
So take for example, teachers. Yes, I agree that teachers create assets over a lifetime. So lets take a teacher at IIM-Ahmedabad. By the end of one term, this teacher would have produced some 150 MBAs. So should we sack the guy?
Revenue expenditure is not about the output that it generates. It is expenditure that you expect to incur year after year in reasonable perpetuity. If that is the case, then it needs to be paid out of current receipts -- tax and non-tax receipts. When you can’t finance all your revenue expenditure from your current receipts, then you borrow to do so. So you are borrowing to spend on something that you know will repeat year after year. You cannot do that.
It is as impossible for a government as it is for a household or a firm. It has nothing to do with the outcome or object of that expenditure. It has to do with its recurrence.
One more debate is the issue of effective revenue deficit. Again, take an example of a grant you may give your relative for an investment in a house. That money may be a capital asset for the relative but it is not your capital asset. It comes out of your current income. It must be viewed as revenue expenditure.
It’s facile to argue about it by looking at individual items.
On Tax & Non-Tax Revenues
On the non-tax revenue front, there has been a shortfall last year on dividends from pubic sector banks and enterprises. This year a small increase is built in. Firstly is that temporary and does it to lead to increased pressure on the RBI for dividends?
I can’t see that as temporary or permanent because I don’t know what the reasons are...
On the RBI dividend, let me benchmark that. I think it is reasonable that the RBI dividend grow by as much as the nominal growth rate of the economy. If it grows by less than that, which is 11-12 percent, then there is cause to ask why. If you look at the increase in payouts, they are in line with that. So I don’t think this is too much of an issue.
Hypothetically, if there were to be some sort of one time transfer from the RBI’s balance sheet, what kind of expenditure should it be allowed to fund?
I don’t think it is a wise speculate. But I can tell you what the logic will be.
Reserves are stock item. So, therefore if there was some transfer, it would be a capital receipt. Not a flow receipt. Therefore, it should not and cannot be used to permanently increase flow expenditure. There are plenty of things you can do on the capital expenditure side but not on the flow side.
But this is all hypothetical. There is no reason to believe that such a transfer will happen. But there is every reason to understand that there is process, which both the RBI and the government have been negligent about, of a dialogue preferably in public domain on the basis on which the RBI holds a certain amount of reserves and the basis on which such reserves need to be transferred.
When there is clear sense of where this dialogue takes us, then there may be a fairly momentous decision of a one-time transfer, perhaps. That does not automatically mean that those reserves would come into the budget. Those reserves could be used, hypothetically, to shore up bank balance sheets.
But the key point is that if it is a one-time stock transfer, it should not be used to raise any kind of expenditure which has multi-year implications.
Do you see the shortfall in GST collections as teething troubles? Or more?
I think its important to say, at the outset, that the commitment to making GST work is very important. And the commitment to making GST work is not linked to the volume of collection in any given year. Therefore, if there is a shortfall in collections, the reason for that cannot be taken to be that GST is not working.
If there is a shortfall in GST, it may well mean that government was, through cascading in the past, collecting amounts of indirect tax revenues which were not legitimate and what GST has done is to correct it. Then you may have to take a view on what we can expect to collect from GST going forward, what proportion of the shortfall is what you call ‘teething troubles’ and what proportion is structural.
That would be the more mature way of looking at GST. The impact of the current shortfall on the budget may be unfortunate but will have to be managed while maintaining fiscal prudence.
The primary aim of every finance minister should be not to slip on a target once announced. If GST is in shortfall, you can make sure other tax collections go up. You can maintain it by cutting expenditure. But maintained it must be for any responsible government. The fact that there was a slippage last year is bad enough. A slippage this year would be unconscionable.
On CAG Report & Borrowings From Small Savings
The government and government organisations have been borrowing more from the National Small Savings Fund. Is that a matter of concern? Could it lead to small savings rates being kept artificially high?
No. This is a self correcting thing. NSSF has to pay small savings investors. Our political authorities will not allow NSSF to go bankrupt. So, in that sense it is okay.
But I don’t like architectural funds and sub-funds any more than I like cess and earmarks. It is all one budget in the end. The NSSF fund ideally should be ring fenced. Any borrowings from NSSF funds anyway involve repayments. You might as well borrow from somewhere else. What game are we trying to play here by using that as a mode of financing versus using the financial markets? Other than a temporary reprieve.
In terms of interest rate differential, it is very small. I am not bothered about it.
It is just lazy thinking to borrow there as you can always borrow from somewhere else. So, why not ring fence NSSF and let it invest where it wants and pays depositors? If it chooses to invest in government securities, or there are architectural rules and requirements as there are for public organizations, then so be it.
Do you think higher public sector borrowings are a risk for the government... The CAG has also pointed out that the total liabilities of the government are understated.
If the public sector borrows a rupee, then there is no implication for the government budget, unless you are saying that if the public sector had not borrowed that rupee, then government would have.
In the case of say fertiliser companies, the government has said that you are borrowing because we have arrears to you which we have not paid. So, we will pay interest on additional borrowings that you have and that is on budget. So, it does have impact on fiscal deficit because it increases revenue expenditure, interest payments components etc. Next year, if the government does the same then it has implications.
Government has three choices every year which is -- Do I pay off arrears? Do I pay interest on arrears? If I pay off arrears, do I do it by reducing other expenditures or increasing other revenues. Those are independent decisions. The fact that the government has, for example, arrears to FCI, it has implication for FCI when the arrears go unfunded. But if the government pays the interest liability, then it is okay.
The CAG would have done well to reflect on this matter before coming to a conclusion. There is an adjective they have used which I take exception to. They said liabilities are ‘understated’. I categorically reject the term ‘understated’ because there is a counterfactual involved there, which is that if this had not happened then the government’s fiscal deficit would have been larger which is not true.
The correction I wanted to make is if these arrears would have not happened in that particular year, if those arrears would have been fully amortized, then either the government would have spent less on expenditure on something else to amortize these arrears or we have borrowed more. I don’t know.
Suppose the FCI had arrears of Rs 100. The government could have cut Rs 100, let’s say, from Ayushman Bharat and paid off these arrears. Then nothing would have happened to the fiscal deficit. I am very surprised that CAG used word like ‘understated’in this context. It is not right.
Watch the full interview here: