Ensuring growth with macro-stability

2015-16 was the first year of the Fourteenth Finance Commission. It was challenging for us, as we had to manage the affairs of the Union with 10 per cent less share of central taxes and duties, and also challenging for you, as you had to suddenly deploy additional 10 per cent untied resources for productive use. It is understandable that being a poor middle-income country, the needs of income transfers and redistribution are imperative, but we must bear in mind that sustainable growth and rise in income levels can only be achieved through a sustained increase in capital spending. I seek your cooperation and more focused attention in this regard.

If I were to summarise our job in five words, I would say, growth with inclusion and macro-stability. Union Budget 2016-17 is a thoughtful step in that direction. As already mentioned in the morning, it was a thematic document which rests on nine pillars that precisely hope to achieve this. I seek your cooperation in converting this dream into reality.

An important announcement was made in para 109 of the Budget Speech. 2016-17 is the last year of the Twelfth Plan. From the next financial year, the Plan, non-Plan distinction will be done away with as far as expenditure classification is concerned. This, however, does not mean planning will go away. Medium-term planning framework and financial approval of schemes and projects can be easily synchronised with the Finance Commission cycle over which both the central and state governments have a clarity over the flow of resources. We also need to move to a cost-centre approach, where establishments, schemes and projects are treated as such, and revenue-capital distinction will be the basis of expenditure classification as required by the Constitutional framework. We have constituted a Committee under Special Secretary Expenditure, which will also co-opt a few willing state secretaries to come up with the new format of budget statements and finance accounts. The primary units of appropriation at both the central and state levels will also be revisited to create a clear distinction between revenue and capital object items of expenditure, so that revenue-capital accounts can be prepared in a bottoms-up manner. We will also see how a more outcome-oriented relationship can be evolved between the golden rule [revenue surplus as defined in the FRBM (Fiscal Responsibility and Budget Management) Act] and the revenue-capital classification of expenditure in the finance accounts.

I will now come to our fundamental role in ensuring macro-stability that provides a platform for sustainable growth. We need to clearly differentiate between our medium and long-term growth potentials. Medium -term growth is the normal operating level of the economy around which the stabilisation policy, both monetary and fiscal, can be practised. It is, by definition, dependent on past performance. Long-term growth, on the other hand, can only be enhanced by structural reforms and improving the productive capacity of the economy. There is no short cut to this, and in fact, use of stimulus instruments beyond the normal operating level of the economy can create serious imbalances - a cure worse than the disease. It is important not to get obsessed with a particular growth number, but to create conditions for a sustained and balanced growth that can incrementally raises our per capita incomes over the next two decades, giving our fellow citizens their rightful place in the comity of nations.

I will next come to our role in helping the conduct of monetary policy. We tend to focus very often on the setting of policy rates. While this is important, equally important is the monetary policy transmission, which cannot be left entirely to the central bank. Our policy interventions can often interfere with the transmission of monetary policy actions. You must be aware that April 1, 2016, onwards, we have moved to a new system of marginal setting of lending rates. This cannot succeed unless we remove the marginal distortions that have crept into our system over the years.

Our decision to rationalise small savings rates should be seen as a positive development in this light. Small savers and ordinary households are also needy creditors, who deserve a better deal than they have been getting in the past. We also need to revisit our interest subventions schemes and replace them with back-ended interest subsidies that do not interfere with the marginal lending rates, and yet have the same effect on the loan repayments as the interest subventions have.

Another area of concern has been the management of liquidity in the financial markets. While the RBI (Reserve Bank of India) has announced a number of path-breaking measures to systemically improve liquidity conditions in our markets, I must also mention to all of you that post October 2015, one important cause of tight liquidity was too much government securities simultaneously offloaded by the state governments to meet their normal borrowing requirements. Having learnt from this experience, we have now proposed a better coordinated and more evenly spaced borrowing schedule over the fiscal year 2016-17. While we will address your concerns, in the true spirit of cooperative federalism I seek your help in the matter.

Lastly, I will come to the fiscal rules, popularly known as the FRBM framework. We have announced in the Union Budget 2016-17 that we will set up a committee that will listen to all suggestions to help us adapt and improve with the changing times. We also seek your counsel and advice to help us put in place what can be called the next generation fiscal framework.

Edited excerpts from a speech by Finance Secretary Ratan Watal at the conclusion of the meeting of state finance secretaries, in New Delhi, April 11