Budget and Beyond: I want an operational modern medium fiscal policy framework, says Rathin Roy

Ahead of Union Budget 2018, Firstpost columnist Seetha discusses the state of Public Finances with Dr. Rathin Roy, Director, National Institute of Public Finance and Policy, and Member of PM's Economic Advisory Council.

FP Staff January 29, 2018 20:31:16 IST

In Budget and Beyond – the series of conversations with key policy makers and influencers – Firspost columnist Seetha spoke to Dr Rathin Roy, Director and CEO of the National Institute of Public Finance and Policy, who is also a member of the Prime Minister’s Economic Advisory Council on government finances. Edited excerpts:

There appears to be a very real possibility of a fiscal slippage. In October, you had said that there is nothing inevitable about this. Do you still feel the same?

. . .The premise on which people are expecting a fiscal slippage, I do not see holding. Direct tax revenue collections are better than expected as a percentage of GDP, even with the lower GDP outturn that we expect to take as a base. Indirect taxes, on the GST front, are uncertain but not so low as to expect that to be a problem.

However, there is a problem with non tax revenue. .  . I don’t see why can’t be addressed because, unlike tax revenue which depends on what you collect, on non tax revenue the government has considerable policy autonomy. Therefore, if that is done, expenditure control maintained, tax revenue does not fall disastrously below what can be projected now, yes, there is no need for fiscal slippage. It will be difficult, but not impossible and certainly feasibly possible. . . .

Is the quality of the deficit is not a mitigating factor for you?

It matters a lot. However, it is no reason whatsoever to run a higher fiscal deficit. If you are asking me if the government should run a higher fiscal deficit with a lower revenue deficit component, the answer is no. .  .

The government should continue to minimise the revenue deficit to the extent possible. Not for reasons of quality of fiscal spending, but purely for the reason that this is a structural trend – borrowing for consumption – that needs to be reversed and minimised. . .

Beyond a point, how much can the revenue deficit be contained?

The FRBM committee has said the maximum you can do feasibly in the next seven-eight years is bring it down to between 25 and 30 percent of the fiscal deficit. That can be done essentially through huge reforms in the efficiency of revenue spending. . . Over time, that will mean with lower fiscal deficit, that will mean lower public debt, so you have growing GDP, lower incremental debt and that will be a falling debt-GDP ratio. When you have a falling debt-GDP ratio, interest on debt as a percentage of GDP also falls, so interest as a percentage of total expenditure also falls, that gives you a little more space on the revenue front. . .

However, we must put in place, in these seven years, the processes that will allow the interest burden to fall, that will allow the productivity of revenue expenditure to rise and allow the government to manage its non railways, non defence, non paramilitary salary expenditure reasonably well. . . . Ultimately, reducing subsidies, reducing government expenditure on organs of state etc will, in combination with reducing the government commitment to provide public goods other than national security and defence and general services,. . . bring us to a stable fiscal position.

The budget is going to be an extremely challenging one for any finance minister. One it is an election year and there are three key areas of expenditure – infrastructure, agriculture and employment. Given these kind of challenges how do you see the exchequer and deficit story playing out.

There is very little electoral bang in an increase in spending by central government. . . it is a different matter when you spend money at the state government level.. . Anything the government spends incrementally on in the next twelve months on infrastructure will have to be in areas the government is involved in, such is railways, highways and will go beyond one year. . . . What would be worse is if hastily the government began providing money in the hope of creating infrastructure before the election. Given our well known fantastic execution capabilities, some of these projects may not fructify before the election

On agriculture what can the government do that it has not already done or state governments have not already done in terms of providing relief to farmers? Government can announce different ways of procurement, more efficient ways of ensuring that food distribution and marketing happens. These are not measures that involve money. . . .  in agriculture it is not spending more money that is going to bring more electoral bang for the buck.

On employment I do not see how you can spend money and create employment.

Isn’t employment more a policy related issue?

Unless you are a vulgarised reader of John Maynard Keynes, yes. What Keynes argued was that the government could run a balanced budget and increase both the size of spending and taxes and use that if you like to dig holes. And digging holes increases economic activity and increase demand. Nothing in what Keynes said implied that the government ought to then run a fiscal deficit. What he said was you raise the size of the state through raising taxes by X and thereby increasing public expenditure also by X. That increase in activity will cause the economy to grow more than multiple of the increase of the size of the state because the private sector is not a source of demand.

That is not the case in India today. .  . Government cannot raise the tax-GDP ratio overnight by 1 or 2 per cent. So the argument for deficit finance expenditure to create employment because of a shortfall in aggregate demand is, I think theoretically weak, in policy terms not credible and in terms of being taken seriously very dangerous. I would urge utmost caution on the part of everyone on policy making before we accept these half-baked arguments. They come from a misunderstanding of economic theory, economic policy and the realities of fiscal policy in India. . . .

You have spoken about the need for a simpler GST. We have seen rate reductions in the GST Council, but is that really simplifying GST, don’t we still have too many classifications issues. . .

I think this is where the political wisdom of India has kicked in.. .  And the speed at which we are moving towards a sensible GST, without punitive rates for specious populist reasons, and the simpler GST is much faster than expected. . . . I think this process will continue and I am confident in the next two years we will have what we don’t have – a real value added tax on consumption.

What announcements would you like to see in terms of fiscal consolidation in the budget speech?

I would like to see a short budget speech. I would like to see not too many announcements. . . I would like to see some action on direct tax reforms accelerated, I would like to see bringing the headline corporate tax rate down and reducing exemptions. . .  I would like to see the tax part of the budget that I saw three years back where it said these are the tax reforms that we need to do and every single taxation measure was linked to one or the other tax reforms. Not a laundry list of I am reducing the tax on cold creams etc. .  . Serious countries don’t do this kind of thing. This is a third world hangover, just stop it. . .

On the expenditure side I would like a clear statement on what expenditure reforms are intended to be undertaken by the government and what these will do in quantifiable terms to improve the efficacy of government spending and how the efficacy will translate into budgetary outcomes. But that will not happen. And that will not happen until the government agrees to genuinely look at fiscal policy at least as a three year rolling process. We need a medium term fiscal framework. . . We are the only G20 country that continues to operate budgetary policy on annual basis. . .

The current medium term fiscal statement that is attached to the budget documents doesn’t meet this criterion?

It doesn’t. It is irrelevant to the budget making process. It is a gestural fulfilment by bureaucracy of a requirement that they accepted from a finance commission long gone by; it is not done in the true spirit.

If you had believed in budgeting then today when the budget circular came out finance ministry would be asked to project their spending for the next three years and argue for this year’s allocation on the basis of what they want to do in the next three years. And they would be held accountable for what they spent last year, what results it brought.. . It puts a real hard constraint on spending by line departments.

On the fiscal side, it gets away from what we have now, which is a medieval form of tax forecasting. Essentially we have targets, we have estimates, we don’t have projections we don’t have forecasts. In the English language and any language, the word targets and estimates belong to one regime of use of coercive power, the word forecast belongs to another regime. . .  So what I want and I doubt I will get . .. is an operational modern and medium term fiscal  framework so we move out of the nineteenth century into the twenty first. Most countries did that in the twentieth century but it’s never too late.

Click here for full coverage of Union Budget 2018.

(The writer tweets @soorpanakha)

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