FRBM panel roadmap became obsolete last year: CEA Arvind Subramanian

Growth seems to be up, inflation is back, there is concern about the fiscal stance, says Arvind Subramanian

A day after presenting his fourth Economic Survey, Chief Economic Advisor Arvind Subramanian said the upcoming Budget would eschew populism and there was a need for a more realistic fiscal road map. Subramanian also told Arup Roychoudhury and Indivjal Dhasmana in an exclusive interaction he saw a three-rate goods and services tax in the next three years. Edited excerpts:
 
What should be the action points for the government in the coming fiscal year?
 
The mantra is to “do no harm”, so no fiscal populism. The government has been very clear about that. We have to finish ongoing reforms. There is the goods and services tax (GST); the twin balance sheet issue which is being dealt with; privatising Air India; and agriculture reforms. We also have to make sure that the macro situation, including oil prices, does not come back to haunt us. In an election year, these are some reforms that will be creditworthy for the Centre.

 

So there should be no fiscal expansion?
 
The government can afford to eschew populism. For three years, when we had a lot of macro space, I recommended spending. But now the situation is different. Growth seems to be up, inflation is back, there is concern about the fiscal stance. Cyclically, the coming year should be about proper consolidation. There will be consolidation, but whether it is aggressive or steady is what remains to be seen.
 
Emerging markets have witnessed sudden stops. My assessment is that while there may not be a stop, India may witness a sudden stall if we are not careful, given where asset prices are. Monetary policy will have to respond then by tightening, and you will have the classic dilemma of stability versus growth. That is why I believe the government will not succumb to populism.

 
Does that mean Finance Minister Arun Jaitley will settle for a fiscal deficit target of 3 per cent of the gross domestic product, as recommended by the Fiscal Responsibility and Budget Management committee?
 
A lot depends on the starting point. I do not want to get into what the panel recommended because they had also advised 3 per cent (fiscal deficit) in 2017-18. They recommended a stall in the glide path. That pathway has been rendered obsolete by events. Now the framework has to be about what is reasonable fiscal consolidation.
 
There are concerns in the bond market regarding the fiscal situation...

 
The government is aware of that. We will be cautious, prudent in the overall context. Now is the time for prudence because the macro circumstances have changed.
 
You spoke at length about “elevated” stock market prices and advised caution. Is it a bubble? And, what can the government and the market regulator do to maintain vigilance?
 
Nobody ever uses the word bubble because it is a negative word, and you cannot predict these things. History is full of these patterns of asset prices reaching certain levels, then there is a sharp climbdown. The higher they go, the more unprecedented the rise, the more cautious we have to be.

 
As to what needs to be done, you cannot take aggressive action, either monetary or fiscal, because that will second guess the markets. I just think there should be heightened and prudential regulation, which I am sure the Securities and Exchange Board of India (Sebi) is providing. One should not be an alarmist even if there is a sudden stall. We have comfortable foreign reserves.
 
You said the markets are misinterpreting higher borrowing by the Centre and states. Higher borrowing means a higher fiscal deficit...
 
States are borrowing not to finance the deficit but to replace other borrowings like the National Small Savings Fund (NSSF). In their case, some Rs 500-600 billion is not reflected in the underlying deficit. People are misunderstanding this issue. Even within the additional borrowing of Rs 200 billion by the Centre, you have to be careful about how much is for financing the deficit and how much is going to finance the NSSF. Remember, borrowing equals fiscal deficit plus the NSSF. So the more you borrow from the NSSF, the less it goes to financing the deficit.

 
Do you think the government confused the bond market by first saying it would borrow Rs 500 billion and then reducing it to Rs 200 billion?
 
In these things, there is always an element of responsiveness to certain instances. The finance ministry tried to be as transparent as it could be. But circumstances are important. You have to respond to those.
 
But banks were caught between the devil and the deep sea....
 
Some of these things are not in your control and you have to respond to them.
 
You talked of stabilisation of the GST. Has uncertainty over revenue and rates marred this stabilisation?

 
The GST has done reasonably well this year. And this is the early stage. Next year, I expect it to stabilise for us to be much more confident about what is going on. There was lot of transitional credit left over. We did not know how much is going to be used. That is why the Central GST and State GST revenues are different. Otherwise, they should be identical. And there is this beast, the Integrated GST. Certainly, much greater revenue stability will occur.
 
According to the finance minister’s calculations, the target for GST revenue this year is Rs 910 billion a month. Four of the six months have yielded less revenue than that...

 
We assume that we are collecting Rs 870 billion a month on average. This gives you a very reasonable growth rate compared to where we started. But that is not going to be a steady state. On the plus side, the Central GST will equal the State GST. But on the negative side we have not paid as much in refunds as we should have. I am not going to spin any of these numbers.
 
The Survey said the weighted average GST collection rate (incidence) was about 15.6 per cent. Will we see rates converging close to that number?

 
India will have multiple rates in the short run. What we are saying is that those rates are giving you the collection of 15.6 per cent. 
 
When do you think we can come down to a three-rate GST?
 
I would say two to three years.
 
You talked about an investment slowdown. What action points do you have for the government?
 
Just follow through with the twin balance sheet challenge and that is going to revive private investment.

You also said we should not concentrate too much on reviving savings by unearthing black money. In that context, do you think demonetisation was a wrong step?

 
I always held the view that savings, whether domestic or foreign, are over-rated. Development economics started with this assumption that the growth rate is low in poor countries because savings are low. But the East Asian experience exploded that myth. If investments increase and you grow, savings will come out of your ears. How do we get financial savings, how do we unearth black money will be important for other reasons, but are not first-order issues for revival of investment and growth.
 
What more should be done for banking reforms, which you called the fourth R?
 
We should lay out a road map for more or majority private sector participation in banks. We have said in the Survey that we have gone from crony socialism to stigmatised capitalism. Experience shows public to private lending is toxic in the context of stigmatised capitalism. Exiting from that is very difficult. That is another reason to have less public lending to the private sector and much more private sector participation.

 
Have successive governments gone too far down the road that the perception of capital is negated?
 
The perception of capital is not something the government creates. Why do we say promoters cannot bid for stressed assets? This is because of stigmatised capitalism. If you are seen favouring these guys, that will invite political trouble. If the government pulls off this twin balance sheet thing, it will be a major achievement, given this “maahaul” (environment) of stigmatised capitalism.
 
Why is the government not realistic in terms of revenue, disinvestment and expenditure numbers?
 
We have realistic numbers on disinvestment this year. It was in 2014-15 that the numbers were not realistic, which I was the first one to flag in the Mid-Year Review. But in 2015-16 and 2016-17, and now, the numbers on disinvestment were realistic. So far as other numbers are concerned, I would say that is why the Fiscal Council is not a bad idea.

 
How real is the danger of an oil price shock? What should the Budget assumption be for the price of oil?

The Budget will assume whatever the projection is. I was surprised by the behaviour of oil prices. I thought it would not go beyond $55 or $60 a barrel. One factor that is new is the Aramco listing. Unless that is behind us, prices are going to be choppy and high. That is something we did not bank on. It is all related to Saudi Arabian geopolitics. Shale not coming back surprises me because it is profitable at $50 a barrel, some even say at $45 a barrel. Although, the rig count has gone up again today.