Finance Secretary T V Somanathan explains the recent telecom reforms; insists revival of economic activity will create demand; and says that on capital expenditure, he is “optimistic” about reaching Budget targets and that there would be “no restriction” from the Ministry.
SUNNY VERMA: Since the lockdown last year, the government has taken a series of important decisions, including the National Monetisation Pipeline (NMP), spending on infrastructure, formation of India’s first-ever ‘Bad Bank’ and the package for the telecom sector. Is there a strategy at play?
Yes, there is a strategy. It’s not as if it has happened in the past couple of months. If you look back, it’s a continuation of things that started from late 2020 onwards, with the first set of Atmanirbhar Bharat announcements, which had, among other things, the mining sector, farm sector changes… Then there was the second set (of Atmanirbhar Bharat measures), then the third set, then the Budget. Asset management and the bad bank decisions were announced in the Budget and are being executed now. So yes, there is a broad strategy towards building a stronger Indian economy with an emphasis on core domestic manufacturing — building the capabilities that we don’t have and preserving the capabilities that we have. There is a consistency… It’s a continuum of things that form a cogent strategy.
SUNNY VERMA: And are you satisfied with the economy’s recovery so far?
It’s a good recovery but we have a long way to go. We are not yet past the 2019-20 figures in terms of actual, absolute levels of real GDP… On the whole, the recovery path has been good, better than many people expected, and I am reasonably satisfied.
SUNNY VERMA: But isn’t there more scope to push the spending, capital expenditure to give a thrust to the economy?
We provided for a much higher capital expenditure in the Budget. The challenge is going to be utilising that. There is a considerable increase… The last figure that I had was about 15% up year-on-year, and it is also up on 2019-20. So capital expenditure from the government is high. It’s not as high as the Budget estimates would indicate, but we have had two very difficult quarters. So I think it will begin to pick up speed in the remaining two quarters. So on capital expenditure I am optimistic that we will reach our quite ambitious Budget targets and there will be absolutely no restriction of any kind from the Finance Ministry’s side on capital expenditure. The issue will be the ability of user departments to utilise the available provisions, because capital expenditure is not the signing of a cheque. It may require land acquisition, construction, environmental permission… many steps to be taken before the cheque can be signed. From our side, the money is available. The departments are doing their best and we are actively reviewing the progress… and there is considerable progress. The increase that we have seen in the first two quarters despite the second wave is a good sign and I am quite hopeful that it will be even better in the remaining two quarters.
As far as room for more fiscal spending, glide path is concerned… When you use the expression ‘glide path’, in your mind you have a paper plane or a glider that you throw at a particular height and by gradual gravitational pull it comes down automatically and lands gently. Fiscal deficits have no automatic downward gravitational pull. If anything, they have an upward path. If they are not actively pulled down, they don’t glide. So glide path is a loose terminology that I, as a fiscal manager, am not very happy with because it implies that if you start at 6.8% (fiscal deficit) it will automatically glide down to 4%… No. If you push it up, it will stay up. So we have to be very careful about how we manage fiscal deficits. We must be realistic about where India stands as a country in terms of global markets. We are following carefully, calibrated fiscal expansion. It’s an expansion which we want to sustain, without the kind of difficulties that we faced in the end of 2009-10, which led to 2012-13… So we don’t want the expansion of these two years to lead to a situation where we are out of control or we have lost macro-economic stability. That is a delicate balance… So we are planning for a calibrated fiscal expansion that will provide support to the economy at a time of acute need, which is why we are not near 3%. We are at a budgeted deficit of 6.8%.
Yes, there are increased revenues in the last two quarters, but one mustn’t forget the expenditure pressures that are already known and are above the Budget estimates. For instance, we have eight months of additional food supply, which will cost us Rs 1 lakh crore. We have an additional fertiliser subsidy, already announced for Rs 15,000 crore. Now, the Commerce Ministry has announced a decision to clear arrears of export incentives worth Rs 56,000 crore… So there are already expenditure commitments which one shouldn’t lose sight of when you say there is enhanced revenue, but there is also enhanced expenditure. The government is prioritising expenditure on the poor and there we are not being constrained by fiscal mathematics. We will make sure they are protected and the government is the only agency that can protect them. For more than that, we have to look at what is prudent and something that will not create a future crisis that will simply ‘glide down’.
ANIL SASI: The government’s Final Consumption Expenditure in the first quarter, as per GDP numbers, was lower on a year-on-year basis. Why has it gone down? Also, you have started incentivising states that have met their expenditure targets. Can this be interpreted as a move to push things more towards the states?
The government’s Final Consumption Expenditure is a result of elevated levels last year. It is not because of reduced levels this year. Last year, this was the time of the lockdown and there was the Pradhan Mantri Garib Kalyan Yojana, so there were a lot of special (measures). For example, there was a transfer to Jan Dhan accounts. So government expenditure in the first two quarters of last year was unusually elevated. This year it is returning to a more normal pattern.
In the Budget we had said that the… 4% fiscal deficit for states would have a component linked to capital expenditure target. Several states have met those targets and others have time till March 31 of this fiscal year to meet the targets. That is part of what was announced in the Budget. It is not a reduction of the Central government’s capital expenditure. It is an attempt to push the state’s own expenditure in the direction of infrastructure and capital spending… This is part of the 1% extra fiscal deficit.
ANIL SASI: On the retrospective tax amendment, we gathered that the decision to move on it was taken after the two arbitration awards (Vodafone, Cairn) came in. But why wait for the conclusion of an arbitration process to start something that is perhaps right?
I would say this: until you lose the arbitration award it is not even clear that you have done something that you shouldn’t do. Hypothetically, if the arbitration award had said that Vodafone has to pay, then is it really good for us to give up taxpayers’ money without even that attempt to see if it’s actually, judicially or arbitrally, determined that they were right in making that claim.. Why should we give up that claim? It is public money. That, I think, was the logic…
LIZ MATHEW: We keep hearing about legacy issues from ministers and officials. What exactly are the economic legacy issues for the government now?
I don’t think at this point I would like to separate legacy and non-legacy issues. The government of the day tackles all the issues that are with us today.
SANDEEP SINGH: While you are allocating funds for the poor, what are you planning on doing for the middle segment, which is responsible for creating demand?
The revival of economic activity will bring a considerable amount of demand in its wake. There are people who think that demand should be stimulated… The problem with stimulus in a vibrant democracy is that it is easier to start a spending programme than to stop it, and then you may lead yourself into a situation where you are spending where you don’t need to spend. So it is a calibration that is quite difficult to pull off. I think demand is reviving because economic activity is reviving. Already you see sectors where the demand outstrips the supply, such as the auto sector… So demand is being considerably revived — more for goods, a little less for services. Shortage of demand for services is not so much a function of the economy, it is a function of the health situation. So as and when mask mandates and closure of service establishments begin to recede with increased vaccination, the demand will come back. A lot of sections that have spending power are not necessarily left impoverished in the pandemic… As the health situation improves, one can expect fairly good recovery… The indirect tax numbers, which are a reflection of the demand, are looking healthy. The GST, excise, customs, they are looking better than I might have guessed in the middle of the second wave. I think we are pulling out of the worst of the situation quite fast.
PRANAV MUKUL: One of the measures announced as part of the telecom reforms was that the government would be able to take payment of statutory dues in equity. How does that play out? Also, on the one hand the government is trying to monetise its assets and on the other you are taking a stake in a company, when you already have a State-owned enterprise.
This is a very context-specific measure. First of all, there are no other sectors where you would find non-tax dues of this magnitude. These are not tax dues. This is a non-tax levy of the government. It is extremely unusual for this magnitude of non-tax levies to affect the existence or survival of an enterprise in any other sector.
Secondly, there is a history of disputes, which have been decided by the courts in a particular way. So it is not as if there was clarity on the amount of these dues over the period in which these dues have accumulated. So in a sense there is an element of uncertainty which was present, which was judicially determined quite recently, which provides a large liability, which may not have been contemplated, rightly or wrongly, by the enterprises there.
Thirdly, it’s an infrastructure sector where the presence of competition is vital. So it is not unprecedented for governments to intervene in the survival of private sector enterprises in situations where the disappearance would affect levels of competition. For example, the US government gave Chrysler a bail out in 1979 because they didn’t want only Ford and General Motors to be the car manufacturers in the US… In India also we have several instances, starting from Satyam, where innocent bystanders could get affected by a situation. We have chosen to take a decision that balances public interest in many dimensions. It is not necessarily a precedent that will be done to other enterprises. The circumstances of each case may be different. This is a very peculiar circumstance, where the preservation of competition and the protection of huge amounts of government dues were best served by this particular mode of operation… So this is an attempt to protect the telecom sector, create a vibrant telecom sector for the future, while also preserving the ability to collect government’s dues.
PRASANTA SAHU: What is your assessment of the revenue situation?
It is looking better than we had anticipated a few months ago, both on the direct side and indirect tax side. Year-on-year it is up 15%, and not 36%, which is the Budget estimate. We want it to be 36%… This much I will say, it is not because of curbs on capital expenditure… So yes, the situation on the revenue side is looking good.
P VAIDYANATHAN IYER: The pandemic has worsened inequalities, globally and in India. How do you look at it in terms of ensuring government benefits reach the poor? Is it just in terms of food grains or much more substantial?
The inequality has two elements to it — the bottom end and top end. I am looking more at the worsening of the bottom end rather than the enrichment of the top end. As a short-term palliative, we have used the food and these immediate emergency measures. So we are not completely out of the woods in terms of saying we have seen the end of the pandemic. In the short term, the government machinery has limitations on what it can do… What we are likely to see, as we come out of this situation, are a lot of programmes that are targeted to help the poor — so you will see a big thrust on drinking water and sanitation, urban and rural housing. So these are ways in which inequalities are addressed, not necessarily only through income transfers. Some of those programmes are announced and in operation, some more are likely to come. These are all means by which you would improve the lot of the weakest within the capacity constraints of the government machinery… The government is focused on doing things that are feasible and will actually reach the targeted groups. I am not saying we have all the answers, We have some answers but we may need to do better. You will see more efforts as we come out of this so-called emergency-like situation that we have been in for a year and a half. As we get to a more normal situation, we will be able to do a little more.
At the top end, the government has already reversed the policy of capital gains being tax free, which is an important step on inequality. Internationally, asset price inflation is the main cause of inequality at the top end. Of course, there is a grandfathering of gains up to 2018. But gains accruing after that are now taxable. Progressivity in tax rates has also increased in the last few years in the individual income taxes.
P VAIDYANATHAN IYER: Last 3 months have seen a barrage of measures and many of them are different from the government’s stated position or action so far — be it Bad Banks or retrospective tax. What has led to this change?
It’s not in a short span, it’s over a year and a half. I would connect this in a continuum starting from May 2020’s Atmanirbhar reform and if you see, all of them have been in one direction… It’s part of consistent efforts to get to an Atmanirbhar Bharat… It is in a broad sense towards reviving India’s capabilities as an economy. I think it is a carry-forward from the Budget. There were some interruptions due to Covid second wave, but we are returning to longer-term priorities.
SUNNY VERMA: Privatisation was a change that was introduced in the Budget. Where are we on that front?
You would have seen that the bids for Air India have been received. A lot of work had to go into that… The fact that we have received two bids is a good sign and we are quite hopeful that we will see success there. Others are to follow. LIC is a stakes sale, not privatisation. That is an advanced stage of privatisation. It’s a classic corporation. It’s not a company under the Companies Act. So even its accounting methodology, standards, everything was different. A lot of progress has been made on LIC.
AASHISH ARYAN: A four-year moratorium on AGR (Adjusted Gross Revenue) and SUC (Spectrum Usage Charge) payments was announced in the telecom reforms. For 2021, the budgeted estimates were Rs 53,988 crore. It looks like telecom companies will opt for this. So this goes out of the estimates for the next four years. How much hit would the government take?
We will have to see how many companies opt for the moratorium. It is NPV (net present value)-protected at its own internal rate of return. Some of those rates of interest are higher than today’s borrowing rates. So not everyone would automatically opt for the moratorium. The offer is open to all. We have to manage the cash flows. But hopefully, if we get better spectrum receipts because of a healthier spectrum market; we will see some offset there.