Informist, Wednesday, Jul 24, 2024
--Fin secy: Would prefer to spend on concrete outcomes in rural areas
--Fin secy: Food inflation remains a concern
--Fin secy: Food inflation difficult to handle until Ukraine war stops
--Fin secy: Certainly it would be good if food inflation was lower
--Fin secy:Fiscal consolidation pace to be slower after reaching 4.5%
--Fin secy: Don't want to get into interest burden spiral
--Fin secy: 9.5% interest expense growth not comfortable for govt
--Fin secy: Need to cut debt to keep interest payment under control
--Fin secy: As a share of GDP, interest burden not rising alarmingly
--Fin secy: Challenge is to ensure interest burden is not grave
--Fin secy: Interest burden not grave for now, need to maintain that
--Fin secy: Clear that FY27 fiscal deficit will be lower than 4.5%
--CONTEXT: Fin Secy Somanathan's comments in an interview
--Fin secy: To take a call on debt-to-GDP glidepath in FY26
--Fin secy: See debt-to-GDP ratio declining beyond 2026-27
By Priyasmita Dutta and Sagar Sen
NEW DELHI – The government's fiscal consolidation strategy and its efforts to bring down debt levels are aimed at preventing a rise in interest expense as a share of GDP, Finance Secretary T.V. Somanathan said.
"Our interest burden is growing at 9.5% while our GDP is growing at 10.5%. So, as a share of GDP, it is not rising. We have to keep it that way. For which we have to bring our debt down," he told Informist in an interview.
"That is why we are keeping the fiscal consolidation continuing and when we make future decisions, we have to keep debt reduction as an objective," he added.
While the current interest burden is not worrisome, the government is not "comfortable" with it and would like to lower it in order to avoid stepping into an interest cost spiral, the top bureaucrat said. "We would like to keep interest rate costs down. We don't want to get into an interest rate spiral, where interest expense becomes a larger and larger share of the budget. That is not happening." Somanathan said.
The Budget for 2024-25 (Apr-Mar) has pegged the government's interest expense for the current fiscal at 11.63 trln rupees, up 9.3% from the interest expended in the last financial year. In fact, the government's interest expenditure is higher than its capital expenditure for the current year at 11.11 trln rupees. But compared with the Interim Budget, the full Budget presented on Tuesday marked down the interest expenditure by 270 bln rupees.
The Indian government will spend 19 paise of every rupee it earns in 2024-25 to pay interest on past borrowings, according to the Union Budget for 2024-25. The government will spend another 4 paise of every rupee earned on pensions and 6 paise on subsidies.
Departing from the steep fiscal consolidation roadmap that the government has adhered to for the last four financial years, the pace of consolidation beyond 2025-26 will be much slower, Somanathan said. "It will stabilise, and won't decline at this pace," Somanathan said.
The government's fiscal deficit had risen to an all-time high of 9.2% of GDP in the pandemic-hit year of 2020-21. In 2021, the government laid out a fiscal consolidation roadmap, under which it set a target to bring down the fiscal deficit to below 4.5% of GDP by 2025-26. Now that the 4.5?ficit target is at a hand's reach, the government has reoriented its focus on not just reduction of fiscal deficit but a sustainable decline of the government's debt-to-GDP ratio as well.
For the current financial year, the government aims to lower its fiscal deficit to 4.9% of GDP, 430 basis points lower than the 9.2% peak in 2020-21.
In the Budget for 2024-25 presented in the Lok Sabha on Tuesday, Finance Minister Nirmala Sitharaman said that "from 2026–27 onwards, our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as percentage of GDP."
At the 4.9% fiscal deficit target for the current year, the central government's debt is 56.8% of GDP, according to Budget documents.
Somanathan said once the government decides on a particular level of debt reduction after 2025-26, the actual debt-to-GDP will depend on nominal GDP for that particular year and interest rates. Further elaborating on the topic, he said debt-to-GDP is a better metric instead of focusing only on fiscal deficit numbers as it will also factor in the interest burden of the government.
Below are edited excerpts of the interview:
Q. What are the chances that by the end of 2025-26, the fiscal deficit will be much less than 4.5%, given the current pace of consolidation?
A. It will be lower than 4.5%. That is the commitment. I cannot predict next year's budget now.
Q. There is a statement in the Budget on the government's intention to lower debt-to-GDP ratio beyond 2025-26. What about the states?
A. Yes, I would like to clarify that our statement is solely on central government debt. We are not able to make commitments on state debts. That would be too wide a basis for us to commit. See up to now, we have had a fiscal deficit target for the Centre. We have not said fiscal deficit of the centre plus states. Similarly, we are looking at central government debt. That will be on a declining path. What will happen to the state governments is a separate question. I am not saying that it (states' debt) will be on a rising path. Where our debt to GDP ratio is positioned is a call we will take in a year or two. Since the debt will go down, beyond 2025-26, fiscal deficit will be obviously below 4.5%.
Q. The interest burden seems to be playing a huge role in all these decisions which we have been seeing for the last couple of years. Exactly how grave is the situation?
A. The situation is not grave, but we have to make it remain that way. The challenge is that it should not remain grave. Today, interest expense is about 11.62 trln rupees as against 10.63 trln rupees last year. So it has grown by about 1 trln rupees, which is just under 10%, about 9.5% (on year) growth. Why it is not alarming, is that our interest expense is growing at 9.5%, and GDP is growing at 10.5%. So, as a share of GDP, interest payments are not rising. We need to keep it that way, for which we have to keep our debt down.
Q. You will ideally want to bring your interest burden down, hence the buyback...
A. Yes. We would like to keep our interest rates costs down. I do not want to get into an interest rate spiral where interest is becoming a larger and larger share of the budget. That is not happening. GDP is growing at 10.5%, interest is growing at 9.5%. That's not comfortable but I would like it to be even lower. That is why we are keeping the fiscal consolidation continuing and when we make future decisions, we will need to keep that debt reduction as an objective.
Q. The government did a bit of buyback in the first quarter of this fiscal. Some of them were not so successful and, hence, T-bill issuance was cut. Going ahead, since you have that offer available right now with you, will it make more sense to buy back future debt this year?
A. A buy back or not a buy back, the point is if debts are coming down, there are two ways to do it. You can buy back existing securities or you can issue fewer securities. We will go towards issuing fewer securities if buybacks do not succeed.
Q. So that would mean cutting your borrowing...
A. Which has been done in terms of T-bill borrowing. It was reduced drastically.
Q. Why T-bills and not dated securities?
A. That is because this year we already have a calendar. There is a certain expectation. So, rather than disrupt that, we thought we would do it in T-Bills.
Q. Going forward, you would want to lower your market borrowing, considering the high interest rate cycle we are in right now...
A. Market borrowing versus other sources of borrowing is a sort of operational adjustment that we make. What should go down is the deficit. Market borrowing cannot go down if the deficit doesn't go down. Market borrowing is the result of the fiscal deficit, it is not what is driving the fiscal deficit. It is our intention to keep the fiscal deficit declining to below 4.5% and after that it may stabilise. It won't decline at this pace after it reaches 4.5%. There may actually be no absolute decline in market borrowing because GDP will be growing.
Q. The smaller your fiscal deficit gets, the more difficult it becomes for you to cut it down actually. However, you have actually given a push towards welfare. So, what exactly helped you strike this fiscal management?
A. Yes, it is a balance that we have struck. If you see, we had an unexpectedly high dividend from the Reserve Bank of India. We have roughly split it half-and-half between new schemes and fiscal consolidation. I wouldn't necessarily call the new schemes welfarism. Obviously, government aims for the welfare of the public. But if you look at them, they are actually schemes which intend to stimulate employment, skilling, housing and rural infrastructure. So, those are all, in a sense, not cash transfer schemes. They are all schemes intended to induce better economic outcomes.
Q. Do you think the tweaks to the income tax structure announced in the Budget will help in boosting consumption demand sustainably?
A. I don't think sustainable boosting of consumption can come from annual budgets. Consumption is a factor of people's incomes and their spending habits. Those are long-term forces, and that's not a variable that we would be tracking...we would be tracking increasing investments, which means increasing savings, so consumption is something that should come on its own. Income tax changes will put more money in the hands of taxpayers...they may spend some of it, they may save some of it.
Q. Considering our CPI inflation is still above the target of 4% and very much dependent on perishable food items and monsoon, is the government comfortable in terms of inflation?
A. Certainly, it would be good if food inflation was cooler than it is now. The rest of it is okay.
Crude I think looks stable for now. Crude I think is not going to give us many big surprises, I hope. If that is the case, then the non-food inflation should be reasonable in the coming year. Food is a difficult one. Until the Ukraine conflict ends, we will continue to see a disruption of global food markets and when they are disrupted, it becomes difficult for any shortage to be handled anywhere in the world, including in India. So upside risk, that's the war which was referred to in the speech, so food inflation remains a concern, but there is money which has been provided for the price stabilisation fund that should help us in terms of more steady procurement of oil seeds, pulses and so on.
Q. MNGREGA was kept at the same 860 bln rupees. So, considering there is demand for it and the rural economy is also doing badly...
A. We would prefer to spend money on concrete outcomes in rural areas, which is why we have stepped up the outlays on Gramin Awas Yojana, Gram Sadak Yojana and all the other schemes, including National Rural Livelihood Mission, so those are, in my opinion, better schemes to address rural requirements than MNGREGA, which of course has been provided with 860 bln rupees.
I don't yet see a need to revise it. But we will have the revised estimates discussions in another three months.
Q. The economic policy framework is quite heavily dependent on state cooperation. The centre is already struggling with some of the states not coming on board for some of the centrally sponsored schemes. How much of that is going to be a challenge?
A. It will be a challenge. But we hope that it is a combination of persuasion and incentivisation. Persuasion through NITI Aayog or collective deliberations and incentivisation through central schemes and loans and so on.
We are planning to bring out a concept paper on funding schemes in challenge mode.
Traditionally, our mode of running schemes is that we say here is the scheme and this is how you will spend money...Instead, we say here is some money that you can tap if you achieve the following objectives. Please send us proposals...the best 10 proposals will get money. So states will bid for that money and we'll give the money. If we say we will give this money to the 10 states which do the following things for ease of doing business. They may do it. It is not a compulsion. I am not saying you have to do it. Those who don't do, don't do. Those who do, will do. End
Edited by Akul Nishant Akhoury
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