2-6% inflation target works well, no need to tinker with it: Sanjeev Sanyal

In a Q&A, the finance ministry's Principal Economic Advisor also explains why he thinks the latest Budget is extraordinary

The inflation target, which is due for the review in the next one-and-a-half months, may not change as the government believes the current goal under the monetary policy framework (MPC) has worked reasonably well. In a conversation with Shrimi Choudhary, the finance ministry's Principal Economic Advisor Sanjeev Sanyal said that the target range of 2-6 per cent does not require tinkering as the government rarely gone outside the range. Excerpts:

Do we see any inflation target framework change as it is coming for review? 

As far as inflation targeting is concerned, the current system has worked reasonably well for what it was designed to do – bring down inflation. Obviously, as with everything else we do, we will do a regular review of it at the appropriate time. But as things stand, this system has worked reasonably well, and I don't think it has any need to tinker too much. Also, it's a reasonable range of 2-6 per cent and we have very rarely gone outside it. Perhaps the CPI basket can be appropriately updated. This is something that is periodically done between the government and the Reserve Bank of India, but it is not part of the budgeting exercise at all.

 

The FM had said this is going to be an extraordinary Budget. Do you think she lived up to the expectation?

This is undoubtedly an extraordinary Budget, because it shows a clear direction for how we intend to reflate the economy in the short term, as well as change the underlying dynamics of our growth strategy in the longer term. The first and important thing, obviously, was to reinvigorate demand. Through the course of the last one year, while we had the pandemic, India had a very different strategy from that of what most other countries did, or what various international experts were advising us. We did not do a big upfront big bang stimulus like some other countries did, because the point we were making at that time was there was no point in pressing the accelerator when your foot was on the brake. After all, the pandemic was not just an impact on the demand side, it was also an impact on the supply side. So, there was no point in trying to expand demand when your supply side is so constrained. The government will now use infrastructure investment to drive demand. If you read the last few economic surveys, we made a very clear case for investment-driven growth. If there was ever a time for shifting India to an investment-driven path, then this is the best moment.

The Budget has taken a supply side approach by focusing on capex, but what about the demand side, as there isn’t any income tax relief such as an increase in threshold etc?

So, there are several things here to be remembered. First of all, it is important to keep taxation rates stable. Second, they need to be competitive. If you remember 18 months ago, we significantly lowered corporate taxes. They are now more than competitive and we have no intention of disturbing them. There were, nonetheless, some US-based economists who were of the opinion that we should increase taxes dramatically, especially extortionate taxes on the corporate sector. And in my view, these economists should certainly advise the US government to sharply increase tax rates. And we will compare the results of what happens in the two countries in a few years.

Budget overhauls the fiscal consolidation roadmap. Your take

The 9.5 per cent of GDP fiscal deficit for this financial year happened due to a number of unavoidable reasons.  The pandemic meant that we had to spend more for health and welfare on one hand. And on the other hand, obviously, the disruptions in economic activity meant that revenues dropped. So the combination of that, and the fact that they were the denominator itself, ie GDP, itself shrunk. This meant there was nothing that much that one could have done about the deficit, other than maintaining some control over wasteful spending. Looking ahead, we have opted to provide a stimulus while maintaining a sensible glide path. The deficit number for next year of 6.8 per cent takes into account both the need for some consolidation while continuing demand support. Then comes the question of our budget assumptions. And I think most of our assumptions for where we are both for growth and for revenue, buoyancy, etc, are more than reasonable. If anything they are conservative.

Why is there a need of extra borrowing in the current financial year?

We are responding to circumstances which are changing. So we have had to keep adjusting the borrowing program to deal with it. I don't think the extra borrowing is a very large deviation that would come as a major surprise to the markets. As you have seen, bond yields have barely budged. So I don't think anybody was complaining about what we did. By and large, everybody recognizes that what we are doing is a very calibrated approach to fiscal management. We have been very restrained, and we will remain conservative. Do not confuse our willingness to pump for growth at this juncture to suggest that we have somehow given up on fiscal restraint. We will continue to spend very responsibly, which is why we have gone for this particular capex-oriented spending push rather than for a dole-oriented one.

Why is there a difference in the nominal GDP numbers in the Budget and in Economic survey?

The budget is based on a little over 14 per cent nominal GDP growth rate. That is, if anything, a conservative number. On the other hand, what we have in the Economic Survey of 15.3 per cent is perhaps a more realistic view of what will happen. My personal judgment is that even the Economic Survey is probably going to be exceeded because it is based on an 11 per cent real GDP growth rate. And the IMF already thinks that we are going to grow by 11.5 per cent in real terms. The budget quite correctly, under promises and hopes to over-deliver. If anything, I think people are going to be surprised by how much growth momentum there is in this economy.

 

Expenditure Secy said that they are willing to provide free vaccination provision to 40% of the population. Do you agree with him assuming the government wants to make it free for those who can’t afford it?

I agree with the Secretary Expenditure on that view. So I have nothing much more to add to that.

India's sovereign rating has been a key concern. You think it's affecting investment?

We have presented clear data in the Economic Survey to show that based on objective indicators, India is rated way too low, given its ability and willingness to pay. It is not as if investors don't know this. Therefore, we have continued to see strong inflows even through the pandemic. We saw large investment inflows, so it is something that it is already recognized by investors globally. Nonetheless, it was necessary, perhaps, to simply lay it out in black and white that India's ratings do not reflect its strengths and the fundamentals. Nonetheless, remember that investors are trying to maximize profits, given the risks and they do their own research. The do not blindly refer to ratings.

On the private sector spending, particularly on research and development, since there is a limited tax incentive there. So what kind of policy option they have now.

First of all, it isn't the case that India doesn't have tax policies in place to encourage the private sector research. It does. And if more is needed, we will add more incentives. But I think a lot of it has got to do with a general culture of not supporting research in India. We have made the case for greater private sector research, but even the public sector needs to show stronger support particularly for science and technology research. Internal research capacities in Indian companies need to be ramped up. So I think there needs to be much greater emphasis on serious research and development in Indian private sector, as well as in the government as well. I'm not absolving the government of not doing enough. But I'm saying that the data shows that the Indian private sector is particularly lagging.