No guarantee that cash infusion results in consumption: Finance Secy

Finance Secretary T.V. Somanathan spoke exclusively with Business Today TV managing editor Siddharth Zarabi on the Budget 2022-23 fine print. Edited excerpts:

BT: Why is that only Rs 5,000 crore is being provided for the vaccination programme next year?

TVS: The vaccination programme is nearing its initial target of full vaccination of two doses of the entire adult population. And, it is nearing completion. It is nearly 95 per cent for the first dose and 60 per cent of the second dose. And, the funding for that first phase is almost completely accommodated within this year’s revised estimates of Rs 39,000 crore. So, the first phase is fully funded in this year’s numbers.

What happens beyond that is the government has opened up vaccination for the third dose to those above 60 years of age, frontline workers and for 15 to 18 years.

The costs of these two are factored into our estimates for next year.

Now, what happens beyond that is something that I, as a finance person, don't have visibility on. It is a matter of how the pandemic evolves and what the health policy is. Funding will follow the policy. So, we are funded for what is currently required.

BT: If this is the sort of financial allocation, what is the assessment with respect to the pandemic impact on the economy? Are we out of the woods? Can we say that FY23 will be the year of growth?

TVS: My hopes are that it is behind us. Two things have changed, one is the level of vaccination in the adult population is becoming very high and will soon be 90 per cent plus with two doses. And, regardless of whether it's a new variant, vaccination is clearly showing up as a preventer of serious illness. So, that's one positive.

The second positive, I think governments and civil society, and the private sector are learning to cope with COVID. So while we started with a complete lockdown in the first phase, we had a more moderate knockdown in the second and the third wave, with much less restrictions being imposed.

So, I think from the economic point of view, more than COVID, it is the physical response to it in terms of closure of schools, restaurants, services and global markets that has an economic impact. So my sense is even if we were to assume that there would be some recurrence, I think the economic impact will be much smaller than the earlier waves.

BT: Will it be correct to say that the additional expenditure allocated for the Covid response is now over?

TVS: The next year’s Budget does not provide for any major COVID-related relief expenditure. But, in the last two years, we have demonstrated that if such contingencies arise, we can respond quickly.

BT: What about the loss of consumption and its lingering effects of job losses and income losses? People are saying that the Budget is not providing a consumption boost.

TVS: Consumption boosts can come directly through infusion of cash to some people, or they may not come. The experience in the west with direct cash transfer is that a lot of it was saved. So it's not that direct cash transfer results in consumption. So, even in India in the first wave, we made massive cash transfers to Jan-Dhan accounts over a period of three months. There was a study that showed that around 40 per cent of those funds were saved. So, it's not as if making cash transfer implies consumption, it can result in saving.

BT:  Is the government making an ideological choice after giving money - why does it want to know whether it is spent or saved?

TVS: There is no guarantee that cash infusion results in consumption. They result in income, but whether that income is spent or not is what matters for the economy.

BT: Some economists would say you are trying to evolve a new framework because cash in the hands of the people is supposed to be a booster in times of recession and slowdown.

TVS: I am not evolving any new economics. John Maynard Keynes may not speak about the modern propensity to save, and if the marginal propensity to save is high, then the multiplier effect of cash transfers is low.

BT: Does our economy need spending or saving at this stage?

TVS: It needs spending and that's why we are spending through capital expenditure. The private sector will have to begin spending when they see investment opportunities, which is what we are trying to kick start with our public expenditure.

BT: The government has made numerous attempts to support private investment. Why is it not happening as expected?       

TVS: So, there were a few years when we had twin balance sheet problems. Bank’s balance sheets were bad and the corporate balance sheets were bad. So, investment was not happening, because banks couldn’t lend and corporations could not borrow.

That was one phase and, as we began to get out of that phase in the financial year 2019-20, we were hit with two continuous years of the pandemic. And, now the pandemic and its physical restrictions, I would repeat, the biggest influence of the pandemic on the economy, apart from actual lockdowns, is the restrictions on the number of forms of the consumer demand.

So, demand stimulation in my view will come more from the removal of the restriction. If you can go to a cinema, then you can buy some popcorn, which means the popcorn supplier who starts supplying it engages workers to supply it, who purchases corn to provide popcorn. So, if that is closed, that is closed. You can’t inject cash and expect that industry to revive.

So, the removal of restrictions is the prime requirement for the demand to restart. If demand restarts now, balance sheets are in better shape, banks are in a better position to lend, the capital markets have funds to lend because a lot of funds are coming in. We are likely to see a revival of private demand.

Hopefully, by the end of this year, we can say that we are creating all the right conditions. We are putting in a strong programme of public expenditure on the capital side, which will create productive assets in terms of telecommunication, roads, railways and widely dispersed state projects with the Rs 1 lakh crore of the state capital expenditure loan. So, this should create a very broad base of demand, because capital expenditure creates demand. It leads to payment of wages. It leads to purchase of materials from companies including MSMEs (micro, small and medium enterprises).

The MSMEs then spend that money to engage people. They buy components, they buy raw materials, that kick-start consumption. That creates demand through which capital investment by the private sector is likely to build up. They see capacity utilisation increasing. They see the need to invest.

BT: How would demand get restored? Take civil aviation – there has been 10 per cent increase in price of aviation fuel, which is being treated as a cash cow. Is that fair to the aviation industry?

TVS: Let me give you a different perspective on it. The taxation on ATF is lower than that on diesel. So, not all petroleum products are taxed at particular levels. India imports most of its oil - we cannot insulate any industry from the impact of the imported oil prices.

BT: Why are people being insulated from the recent price build up in crude oil? For the last 85-odd days, oil marketing companies have not raised prices. Why is daily price change suddenly sacrificed, as some people call it, at the altar of political expediency?

TVS: I am sorry for that you have to ask the petroleum secretary.

BT: That is a fair point, fair point. But you were making a point about passing on the burden equitably in the fuel prices.

TVS: What I'm saying is when you say that airfares have gone up, they've gone up because international fuel prices have gone up.

BT: From the budgetary point of view, how much of risk have you factored in on rising crude oil prices for the next financial year?

TVS: Oil prices don’t directly enter into Budget calculations, because we don’t have any item that is directly related to them. Excise duties are specific duties, they are not value-added duties. So, oil prices do not directly figure in the Budget numbers. Its indirect impact would arise through inflation. Inflation does for various prices, what it does for the dearness allowance.

BT: If consumption is going to get kick-started, obviously inflation rides along with it. What is your view on how inflation is likely to pan out in the next four to six quarters?

TVS: I must start by telling you in a lighter vein that I am yet to meet any economists and analysts who have been successful in predicting even one quarter ahead. I am much less knowledgeable than them. So, my predictions are going to be much worse. But what I would say is that we have tools in our hands with which to manage various international contingencies that may hit us on inflation. In fact, currently, we have a problem with elevated commodity prices. Not just crude oil, it also affects our fertiliser (subsidy) bill. So, those risks are there. But, I think, we have the ability to handle them.

BT: Have you been conservative and trying to prepare the market by underpromising on certain items including revenue buoyancy?

TVS: Not really. We have been conservative in estimation. There is a difference between deliberately underestimating and estimating at a conservative level. We have taken conservative estimates. We have not anticipated the most optimistic scenario. We have taken something which is a more realistic scenario, given the different risks that are prevalent.

BT: Is the clean-up of the economy over? There were many poison pills scattered around and they kept popping up. Is that now behind us?

TVS: I think to a very large extent, it is behind us.

BT: After Air India, why is Bharat Sanchar still being fed?

TVS: Last year, the government announced a public sector enterprise policy. This policy, was an inversion of the 1950s commanding heights public sector policy because it said the government would divide the public sector into two categories, strategic and non-strategic. The policy stated that in the strategic sectors, the government would continue to have a presence but with a minimum number of public undertakings. And, in the non-strategic sectors, the government would vacate those sectors by eventually privatising all the public enterprises in those sectors.

Telecommunication is a strategic sector.

Therefore, it is the policy of the government that there would always be one public sector undertaking in this sector. So, this is not one where the eventual goal is privatisation. The eventual goal here is minimal presence that exists for two reasons – to protect consumers, if there are monopolistic or non-competitive tendencies in the industry, by having at least one alternative.

And secondly, there are issues of reach to remote areas and villages. It is not as if a private sector has actually reached. There are many parts of India, only where the signal that you will get will be BSNL. Absolutely, so BSNL will continue in the future.

BT: Why has Bharat Broadband not been able to meet targets?

TVS: That’s an issue of execution. And, I am sure that the government will improve on that this year. Initial provisions have been made. And, course corrections have been done. And, I think, we are on course to complete the target this year.

BT: What is the philosophy on social sector spending including the cutback on the rural employment program, which has seen substantial leakages in a few states? Is that a matter of concern?

TVS: The leakages in MNREGA are a matter of serious concern. And, we have taken cognizance of those reports and subsequent anecdotal reports from the other states indicate that it is not peculiar to one state. In fact, they are more widespread. So, yes, that is one area of attention, which I am sure the Ministry of Rural Development would be looking at very carefully. In terms of tightening systems, making sure that whatever is spent reaches those who it is intended to reach.

In terms of Budget provisioning, we have provided the same level as last year’s Budget. It is a demand-driven scheme.

And, we remain committed to funding as the demand rises. But it is our expectation that with large increases in spending on other programmes, including the Pradhan Mantri Gram Sadak Yojana, where we have a huge step up this year. Where we had a huge 27 per cent increase, we also made provision for meeting part of the share of states. So, it is our expectation that with the pandemic receding, no major lockdowns, limited restrictions, and without the kind of out-migration that you saw from big cities two years ago, it is unlikely that there would be a major surge in MNREGA demand compared to the last two years.

BT: What is your view about Jal Shakti allocation and its outcomes from previous funding?  

TVS: So, for the Jal Jeevan Mission, specifically, which is a tap in every house, the allocation this year is Rs 60,000 crore- the highest ever and it expects to complete 38 million tap connections. They made substantial progress in the last two years. But, the biggest years in terms of outputs are this year and the next year. They are on course to get the job done.

BT: Why did you not opt for a reduction of the fiscal deficit in the current financial year?

TVS: We do not construct our estimates, we are not the kind of company that tries to meet analyst estimates.

So, we don't try to positively surprise our analysts. I mean, it is for analysts to analyze what they analyze and we may or may not meet their consensus estimates and that doesn’t drive our key decision making. So, I think, a lot of people, those who were predicting our numbers, for some of those it is the profession to predict the numbers. I think we are looking at the revenue side and they are absolutely correct on the revenue side.

However, there were two numbers which, perhaps, were not widely understood. One is the disinvestment number is not Rs 1.75 lakh crore, we are down there by Rs 1 lakh crore.

There is also on the expenditure side, this belief that the money will somehow not get spent. In my opinion, now people have forgotten that there were huge increases this year because of the COVID relief packages. So, Rs 1 lakh crore for food. Then there is a fertiliser subsidy, (nearly doubling) and Rs 22,000 crore added for the health sector.      

If you add all of these up, they are pretty substantial. So, the effect of the numbers that we are showing is the best estimates that we have as of the time these estimates are done. So, this is a very dynamic situation. We have done the best job so far to come up with realistic numbers that will not result in negative revision after the event.

BT: The National Statistical Organisation periodical labour force for FY20, released in July 2021, showed a rise in the share of the labour force in agriculture, despite policy objectives moving them out of agriculture. Real wages in the rural areas have turned negative, and all agricultural and non-agricultural operations so far in FY2022. Is it not perplexing, typically, when a disturbing trend and distress is building up in rural India?

TVS: I have not seen the report. But I am sure that you are reading it correctly. I am not disputing that. But, I would say that the years that you are referring to are the years when the whole world has been subject to distress. India has not been an exception. To choose 2021 and 2022, and say that there is distress. I would admit that. I am unhappy about it, but it is not anything that governments in any country have been able to prevent, it's a difference of one polity and another.

So, on to the larger question of what is to be done for agriculture -- the government remains committed to improving the incomes of prominence. The MSP programme remains very strong.

It's fully funded, record levels of grain procurements are being done and MSPs are being extended beyond the narrow range of two or three north Indian states. Recently, just this morning, I had somebody from Assam telling me that MSP procurement has been done really successfully in Assam.

Now, this is the way the government is moving and adequate money is provided to back all the farmer programmes.

The PM Kisan programme has finally reached some states where the state has decided not to use it earlier. So, that is being done and the agriculture budget is up.

Now, a portion of the distress particularly in 2021 is affected by the migration that happened. It is affected by the peculiar circumstances of that year. I wouldn't draw a trend based on that, nor would I minimise the issue of improving agriculture income. It is a long-term thing and we are working on it. And, we are very committed to improving agriculture.

BT: What is your opinion on the debate about people becoming better off and those at the lower end suffering, and inequality? Do you agree particularly in the context of rural stress?

TVS: I have not seen very credible data on this. I am not disputing it. But I would say that this is more anecdotal and perception. It is absolutely true that people investing in stock markets have done very well. And, that they are mostly the rich. So, I think that is absolutely true. Perhaps, there is a case that they have to pay more taxes, but the government has chosen to stick with its stable tax policy.

Is it worsening? I have not yet seen clear data that one way or the other, but we remain very conscious of the need to protect the poor. It is something that the government has paid a lot of attention throughout the pandemic.

BT: As many as 40-odd platforms are providing crypto services. People have entered into it in the absence of any regulatory regime. The government has not yet framed the law, yet a punitive kind of taxation is being imposed, treating it like gambling. Is it fair to do this in this manner? Why not law first, regulation and then, a stable taxation regime?

TVS: No, I think the income tax act doesn't exempt any kind of income except agricultural income. Income from crypto has been taxable even before this law. It is taxable today. And, it will remain taxable after April 1, what is changing is the regime of taxation. So, it is taxable even before April 1. But, not at 30 per cent. It is taxable based on the classification of that income, either as business income or as a capital gain. It fits into different chapters of the income tax act and with appropriate rates.

That is a bit confusing because it creates a lot of uncertainty or potential for disputes. So all that has been changed and clarity is coming from April. But it is taxable even today. Let me make it very clear. Nothing is exempted from taxation because it is unregulated. So, if you speculate on horse races, it is taxable. We don't have a horse race regulatory authority in India. But, it is still taxable.

Everything is taxable unless it is exempted. And, only agriculture is completely exempted. It should not be that something needs to be regulated. And, there are many spaces, there is a space of legal regulated And, then there is a space of legal unregulated. And, then there is a space of illegal. So, crypto is not in the illegal space. It is not yet in the legal and regulated space.

It is in the space of legal and unregulated. But, legal and unregulated is taxable, and even illegal is taxable. When an IAS officer takes bribes, it is taxable. So, crypto is legal, unregulated, and taxable.