Maintaining capex at over 3% is a good benchmark: DEA Secy Ajay Seth

Seth explains the rationale and the Budget fine print

The Budget 2025-26 (FY26) gave a road map to bring down debt-to-GDP ratio to around 50 per cent by FY31. Department of Economic Affairs (DEA) Secretary in the Ministry of Finance Ajay Seth in an interview with Ruchika Chitravanshi and Asit Ranjan Mishra explains the rationale and the Budget fine print. Edited excerpts:

 

There seems to be a plateauing of capital expenditure. Do you think as a percentage of gross domestic product (GDP) we have hit the ceiling?

 

In the July Budget, the finance minister had said that “we have brought it to a high level and we maintain it in moving forward in nominal terms relative to GDP, and expect the states to spend around an equal amount”. Emphasis on capital expenditure (capex) remains, but we were spending close to about 1.5 per cent of GDP, and we have brought it up to 3 per cent-plus. Fiscal consolidation has to be taken care of. Maintaining capex at 3 per cent-plus is a good benchmark to set. I'll draw your attention to yet another aspect, which is effective capital expenditure, including the money that is going to be provided to states for their capex. Put together, it is as high as 4.3 per cent of GDP. Our fiscal deficit next year is going to be 4.4 per cent. That means almost the entire net borrowing of the Government of India is going towards investing in hard, physical infrastructure.

 

 

A few things pending from the last Budget include the cryptocurrency discussion paper, economic policy framework, and financial sector vision and strategy document. What is their status?

 

We are fairly advanced on two activities. We had aimed to complete them by January, but it has taken a little more time. Economic policy framework draft is available. We have done a round of consultation with people in the public policy framework, and we expect to come out with a discussion paper by March. Vision document for financial sector is still in progress. As far as crypto work is concerned, we had almost finalised our discussion paper. Then we realised that a number of jurisdictions have got a fresh idea on how they would like to deal with this asset class. Crypto assets don’t believe in borders. For us to come out with a discussion, which does not generate informed answers from relevant stakeholders, will not serve the purpose. We are in the process of recalibrating that discussion paper. Idea is to come out with it quickly so the policy stance gets clearer. At least a couple of jurisdictions have got a different way to look at it, whereas in 2023 when the framework was agreed upon in G20, the stance of each country was well known.

 

Do you see scope for significant reduction in fiscal deficit to achieve the debt-to-GDP ratio by FY31, or you see it to be maintained at the level of 4.4 per cent of GDP for a few years?

 

One very senior informed person has commented: Is the government doing away with the fiscal deficit target? Not at all. It will flow from there (Fiscal Responsibility and Budget Management, or FRBM). Even the road map (to reduce debt-to-GDP ratio) envisages three levels of a fiscal consolidation — mild, moderate, and high. In a year when the economy is doing well, that means support to the economy from the fiscal side is rather limited and consolidation can be much higher. On the other hand, in a year, when the economy needs support from the fiscal side for this expenditure in that year, the fiscal consolidation can be milder. But if you stay at 4.4 per cent, we will not reach 50 per cent (debt-to-GDP ratio). It is premised on mild, moderate, and high. Every year, there will be a fiscal deficit number but that will flow on the dynamics of the overall economy, growth plus where we are at that point of time.

 

Are you aiming to reduce debt-to-GDP ratio by one percentage point like you have done this time?

 

In FY21, the finance minister had announced that by FY26 our goal is to bring it down to 4.5 per cent. It was not practical to say in FY23-24 what will be the fiscal deficit, because we are dealing with a very complex and dynamic situation. But the path is very clear. In a similar manner, we will be at 57 per cent (debt-to-GDP ratio) by the end of this year. We will be 50 or plus/minus one percentage in six years, which is a decrease of six to seven percentage points. In some years it can be more and some it can be less. The monitoring will be on debt to GDP. Fiscal deficit will be a derived number from there. But nevertheless, every Budget will have a precise fiscal deficit number.

 

What are the changes you are hoping to bring in the model Bilateral Investment Treaty (BIT)?

 

Model BIT has moved beyond 2014 template. Given the global scenario, it is felt that there is a need to revisit some of the assumptions there. We want to make it more investor-friendly and at the same time take care of our larger concerns, which had led to the 2014-model BIT. We expect that in the coming months that exercise can be completed.

 

Can you explain how Rs 47,000 crore allocated towards new schemes under the DEA is going to be used?

 

For several schemes, allocations have already been provided, but for some specifications have not yet been done. For example, allocation has not been made for the Maritime Development Fund. It will be done depending upon how the contours will evolve. Other requirement is for various funds of funds, those allocations are yet to be done. As and when those sectors are ready with their schemes, allocations can be done for them.

 

Will the finance ministry also ask states to make debt to GDP as their financial anchor?

 

It is not for us to push them into a direction, but our guidance to them has been that don't exceed 3 per cent of GSDP. Conversation is to guide them towards a more capital orientation rather than a revenue one. The correction will take time.

 

This is 10.1% nominal growth, or do you think this is an underestimation?

 

It is a practical estimation with real GDP growth rate of 6.3-6.8 per cent and a deflator of 3.5-4 per cent. Therefore, the estimation is reasonable.

 

For capex, you have by December spent Rs 6.8 trillion, and you are targeting to spend Rs 3.4 trillion in next three months, as per the FY25 Revised Estimates. Is this achievable?

 

January has been a good month. The capex is about 4 per cent higher than the previous year.

 

So, any concerns about the Trump impact on the Budget announcements?

 

Budget-making is for our domestic parameters. The Export Promotion Mission has been announced to make our export a lot more competitive in the midst of a global economy, which is expected to see a very moderate growth. Even the global trade growth rate is also expected to be on a lower side. In that context, what is in our hands is to increase competitiveness of our exports. What happens in the rest of the world, we don't have any control over.

 

What is the premise of the Budget this time? Was the slowdown in urban demand a driving factor?

 

There are several factors which go into preparing a Budget of the Union government for an economy of our size. We require more productive investment and need to bring the focus very sharply on the main drivers for growth. That was the first thought process, which brings in agriculture, MSME, investment, exports, and taxation.

 

Six months ago, we were talking about rural demand being subdued. Then the conversation changed. Now it is urban demand and some segments being less than the other ones. Then there is the expectation of the people, especially the middle class. The Budget addresses that expectation and any softness in the demand. These are the five elements. Each one has its own importance. It depends upon which ones you want to lay your emphasis on.