RBI, government on same page on monetary policy panel: Shaktikanta Das
Interview with Economic affairs secretary
 "RBI, government on same page on monetary policy panel: Shaktikanta Das")
The central government's Economic Affairs Secretary, Shaktikanta Das, is a veteran of economic policymaking and is also responsible for the budget division of the the finance ministry. In an interaction with Arup Roychoudhury and Indivjal Dhasmana, he explains some of the thinking. Edited excerpts:
This Budget was marked by a focus on agriculture and infrastructure spending. How will investors and markets view it in terms of what it has for them?
An enabling environment for domestic and foreign investors is the government’s responsibility and what the Budget has done. Our focus is on removing the hurdles and making it possible for investors to revive the sentiment, and come and invest. If among emerging markets (EMs), they don’t come to India, where else does the money go? If you are a passive investor, who wants to invest in government securities, they will go to the US market. But, for those wanting to invest in business and industry or other activities in the real economy, India is the place among EMs.
What capital market initiatives can the investors feel happy about?
Lots of measures have been announced to deepen the bond markets. In the main speech, we have talked of the monetary policy framework and monetary policy committee. We have talked of the comprehensive code on resolution of financial firms, equivalent for the proposed bankruptcy law but for financial services companies. We have talked about data integration, about deepening the corporate bond markets. We have talked about increasing the retail participation in government securities and a lot of measures relating to capital markets and foreign direct investment are in the annexure.
There is also concern regarding the securities transaction tax on options and derivatives.
Trading in the derivatives segment was 14 times the volume of delivery-based trading. That adds to the market volatility and uncertainties. One of the reasons attributed was lower tax. By increasing the rate and making it 0.05 (per cent), the idea is to make it more delivery-based.
This Budget was marked by a focus on agriculture and infrastructure spending. How will investors and markets view it in terms of what it has for them?
An enabling environment for domestic and foreign investors is the government’s responsibility and what the Budget has done. Our focus is on removing the hurdles and making it possible for investors to revive the sentiment, and come and invest. If among emerging markets (EMs), they don’t come to India, where else does the money go? If you are a passive investor, who wants to invest in government securities, they will go to the US market. But, for those wanting to invest in business and industry or other activities in the real economy, India is the place among EMs.
What capital market initiatives can the investors feel happy about?
Lots of measures have been announced to deepen the bond markets. In the main speech, we have talked of the monetary policy framework and monetary policy committee. We have talked of the comprehensive code on resolution of financial firms, equivalent for the proposed bankruptcy law but for financial services companies. We have talked about data integration, about deepening the corporate bond markets. We have talked about increasing the retail participation in government securities and a lot of measures relating to capital markets and foreign direct investment are in the annexure.
There is also concern regarding the securities transaction tax on options and derivatives.
Trading in the derivatives segment was 14 times the volume of delivery-based trading. That adds to the market volatility and uncertainties. One of the reasons attributed was lower tax. By increasing the rate and making it 0.05 (per cent), the idea is to make it more delivery-based.
You have ramped up capital spending for a second year. How long does the government have to do this before the private sector picks up?
We recognise that private spending is not taking place and we need to spend more. More, there is a requirement in the economy. The government has identified which sectors require a spending push. The first was agriculture, given the problem of rural distress. Then the social sector, infrastructure, investment, and then the financial sector reforms. In that order, the challenges were identified.
When we talk of rural sector distress or rural infrastructure, there is a requirement to spend money, whether there is private sector investment or not. Even if there was private sector investment, we need to spend more on railways, as development of the country is greatly attributed to development of the railway network. We still need to complete a lot of rural roads. So, we have given Rs 19,000 crore for rural roads, up from around Rs 14,000 crore in the previous two budgets. Investment in roads and railways addresses the infrastructure bottlenecks which our economy suffers. The major challenge to our investment scenario is the poor infrastructure. It also adds to economic cost. These investments in infrastructure will have multiplier effects.
How much of an upside to the Economic Survey's growth projections do you expect from your push in agriculture?
Broadly, our calculation is that growth will be upward of 7.5 per cent, We hope this year we will be luckier with regard to the monsoon. There is rural distress; the biggest problem is the rural sector slowdown due to poor rainfall. It is not an act of political messaging but a recognition of the challenges facing the real economy.
What are the inflation number projections? You are projecting 11 per cent nominal growth. The Survey projects 7-7.75 per cent real Gross Domestic Product (GDP) growth. What are the deflators for nominal growth that you have projected?
Inflation, we don't have a fixed number. We basically have a range of what the monetary policy framework expects, which is below six per cent by January 2016 and four per cent by January 2017, plus/minus two per cent. We are broadly aligned to that.
Which means on the growth side, you are conservative.
On the growth side, yes. We are broadly assuming growth will be on the lines of what the Survey has projected, with a bias to the upper side.
There is a sense, from a macro economic point of view, that there are cushions in the revenue numbers you have projected. Is there a deliberate underestimation of numbers, so that there is an upside at the end of the year?
The revenue and expenditure projections are both very realistic. Revenue growth is projected at 11.7 per cent when the nominal GDP is projected at 11 per cent. Therefore, that is reasonable. The revenue numbers do not take into consideration the compliance scheme for domestic black money. Nobody knows how much we will get from that. It is not meant to be additional resource mobilisation but a final opportunity for people to come clean. But, that will being in money. Plus, there are the dispute settlement facilities on the direct and indirect tax side which have been announced. The revenue gains from those have also not been projected.
Non-tax revenue projections for FY17 constitute almost one per cent of GDP. Is that a risk, given that disinvestment and telecom spectrum expectations can get derailed for a number of reasons?
On the dividend side, we have revised the guidelines for CPSEs (central public sector enterprises). Earlier, it was 30 per cent of profit after tax from oil PSUs and 20 per cent for others. Now, it is 30 per cent across the board. On disinvestment, we have a new policy which the Cabinet has very recently cleared. It is high on the agenda and will be taken forward. On the normal disinvestment target of Rs 36,000 crore, it is achievable. Even for this year, we have achieved Rs 18,400 crore so far in a bad market and are projecting Rs 25,312 crore. On spectrum proceeds are concerned, it includes licence fees which we get per annum, about Rs 20,000 crore. Actual spectrum auction projections are Rs 50,000-55,000 crore; the rest is arrears from various companies.
One criticism is that your subsidy numbers don't show the impact of any reforms in the subsidy sector. In actual terms, combined major subsidies are up five per cent from the revised estimates.
Food and fertiliser subsidies are critical for the economy and have to continue. The focus of the government is to make subsidies more targeted. So, the Aadhaar Bill is coming, in a few days. Diesel and petrol subsidies are gone. There is already direct benefits transfer (DBT) for cooking gas, as well as the pilot scheme which has produced good results. DBT for kerosene has also been introduced. Now, we will do DBT on a pilot basis for fertiliser. It will be more challenging because we are moving from a production-based subsidy to a consumer-based one. We will be careful that it does not cause any disruption to supplies.
What are we expecting in terms of the Monetary Policy Committee?
It is part of the finance Bill. It is three plus three. The Reserve Bank of India (RBI) will have three nominees, including the Governor. The government will have three nominees. The casting vote will be with the Governor.
I want to go on record and dismiss any talk of tensions between RBI and the government. There is nothing like RBI will have three members and the government will have three members. RBI and the government are part of the same system. Almost all decisions are taken on the basis of unanimity and there is excellent understanding between RBI and the finance ministry. The Governor (Raghuram Rajan) himself has said both are on the same page.
It is part of the finance Bill. It is three plus three. The Reserve Bank of India (RBI) will have three nominees, including the Governor. The government will have three nominees. The casting vote will be with the Governor.
I want to go on record and dismiss any talk of tensions between RBI and the government. There is nothing like RBI will have three members and the government will have three members. RBI and the government are part of the same system. Almost all decisions are taken on the basis of unanimity and there is excellent understanding between RBI and the finance ministry. The Governor (Raghuram Rajan) himself has said both are on the same page.
The minister had also announced the setting up of a committee to see if instead of fixed deficit targets, we can consider a range.
The government will appoint a committee, and the committee will look at the issue. The whole issue is if we can really target a fixed number and be tied up to that. The global situation is volatile. In a good year, we can target a better fiscal deficit performance than three per cent (of GDP). Why not 2.75 per cent if revenue resources are doing well and the economy is booming? In a difficult year, the government needs to spend more. Then, instead of three per cent, if we go to 3.2 per cent, why can't that be done? One suggestion was on having a range. The committee will be constituted very shortly, in about a month. The existing fiscal road map stands. The minister has made that very clear. The intention is to deal with a dynamic situation, in an economy facing increasing volatility and uncertainty.