Union Finance Secretary T.V. Somanathan, a 1987-batch IAS officer from the Tamil Nadu cadre, is an expert policymaker with previous stints in the Prime Minister’s Office and as Director at the World Bank, Washington D.C. A PhD in Economics and a chartered accountant, cost accountant and company secretary by training, he is closely involved in the preparation of the Union Budget every year. In an interview with Business Today’s Surabhi, the 58-year-old says that the projections in the Interim Budget this year are as realistic and credible as if it were a regular Budget. Somanathan, who is also Secretary, Department of Expenditure, is confident that rural consumption will pick up this fiscal and explains why the rate on the popular public provident fund has been kept unchanged for several quarters, given its high post-tax returns. Edited excerpts:
Q: The Interim Budget has increased capital expenditure by 11.1% for FY25. Effective capital expenditure is estimated to grow by 17.7% to Rs 15.3 lakh crore. How much more can the government invest in capital expenditure?
A: I think that we have probably reached the level of capital expenditure as a percentage of GDP that we can sustain for some time. I don’t think it is likely to increase much as a share of GDP. One can probably expect capital expenditure to increase at or slightly above the rate of nominal GDP growth. Beyond that, I don’t know whether that will be fiscally sustainable. Now that we have reached a fairly good level of 3.4% of GDP as capital expenditure, maintaining that could be a decent objective. The GDP would also grow.
Q: Is the government more confident now about a recovery in private sector capital investments?
A: I am optimistic that there will be a recovery in private capital investment. Am I confident? I wouldn’t say so because I don’t know enough. This depends on the investment intentions of the private sector. I only get secondary and second-hand information on this. But I am told by industry bodies and chambers that yes, there’s going to be an upswing in private capital investment. And I hope that what they say is true.
Q: The fiscal consolidation road map in the Interim Budget seems to have made rating agencies quite happy. Do you think this is the right time for India to maybe pitch for a ratings upgrade?
A: I don’t think that India should seek any ratings upgrade on the basis of these figures. I think the rating agencies have a job to do. If we are performing better, it is for them to reassess whether we should be rated differently or not. I personally am not very sanguine about the way rating agencies rate developing countries or emerging market economies… I think there are differential or double standards between different groups of countries. India is not in global G20 terms a very highly indebted country. Also, our debt dynamics are pretty favourable because we have high nominal GDP growth, which is going to be sustained for a long period of time. The interest rate versus growth rate differential is also fairly favourable to us, compared to many other economies, whose growth rates are lower and whose interest rates now are not very different from our interest [rate]. There was a time when developed country interest rates were very low and one could argue that they had high debt. But it doesn’t matter because… their interest rates are not so low now. In relative terms, India’s debt dynamics look very healthy [when] compared to many of the countries of similar economic size. Of course, the rating agencies say that we rate by peer groups, but this peer group seems to be rather arbitrarily determined. We have not done anything with an eye on the rating agencies; we have done it because we believe that it is in the best interests of India’s economy to keep the fiscal deficit and debt under check. If that is a matter for ratings upgrade, that is for the rating agencies to decide, but I am not expecting anything from it.
Q: How far will the projections between the Interim and full Budget change?
A: I cannot speak for a new government that will be formed in June… which government it will be is a matter for the electorate to decide. But I would say that the fiscal projections we have made are realistic and credible and they are based on the current set of policies, the data, and the information that we have. They are credible projections, and in all probability, they should continue into the regular Budget—at least the fiscal figures. I can’t speak about policy changes. Any moderate policy changes also may not lead to much change in the fiscal estimates. But if there are major policy changes, I cannot predict them. Otherwise, we have presented the figures that we would have presented if this was a regular budget.
Q: The Interim Budget spoke about the next-generation reforms by states. What should these be?
A: We are still working on the details. Every year for the last three years, we have had one component of the interest-free loans tied to reforms. And the components have been [things] such as urban reforms, sometimes connected to electricity sector reforms. We are working on the right mix, and it will get eventually clarified when the guidelines are issued. This year, it is probable that for the conditional loans, the guidelines will come out in the first quarter of the next financial year.
Q: What kind of reforms would you like to see post the General Elections?
A: I should not pre-empt what the regular Budget may say. You heard the Finance Minister say that some road maps will be laid out. It would be not proper to predict what may come in the regular Budget.
Q: The Interim Budget also spoke about the eastern states and their development. How do you see this taking place?
A: We have an Aspirational Districts programme, where we have a special focus of both development activity and development expenditure on these districts. [And] 60% of the aspirational districts are located in eastern India. This is an illustration of the focus that the government is giving to the East in its social programmes and in its economic development programmes for the poor, and for the vulnerable sections. This is one part. Second, government capital investments from the public sector, in the form of new fertiliser plants [and] new gas pipelines are also concentrated considerably in the eastern sector. So, these are some of the initiatives. And beyond this, the government’s mineral policy reforms, which were undertaken in the last five to seven years, have resulted in a huge increase in revenues in some of the eastern states, particularly Odisha and Jharkhand. The new mineral regulations have given an impetus to development in the East through much enhanced state revenue. We are seeing this impact in some of those states. In Odisha, in particular, there is a huge expansion of capital investment and other development activities funded by their own enhanced mineral revenues.
Q: Are you concerned about the rural economy given that the monsoon distribution last year was sketchy and there are worries about the rabi output? How far are the Interim Budget projections dependent on a good monsoon this fiscal?
A: I wouldn’t say there’s any direct link between the [Interim] Budget projections and the monsoons. If the monsoon is moderately good, these Budget projections are fine. If the monsoon is very adverse, then the impact will be on a number of sectors. It could lead to some kind of relief expenditure, or it could lead to food inflation, which may lead to various other economic measures. But as of now, it does not seem to be a very likely scenario. Whether it’s a moderately good or a good monsoon, these estimates will still be holding good.
Q: What are your thoughts on the rural economy?
A: We have just announced a huge expansion in the Pradhan Mantri Awaas Yojana–Grameen, which will lead to an additional 20 million houses to be built in rural areas. We have continued the Budget outlays for the PM Gram Sadak Yojana, [and] we have enhanced the Budget provision for the Mahatma Gandhi National Rural Employment Guarantee Scheme. For all these government programmes, the expenditure is increasing or being maintained. That is from the government side.
In terms of private consumption expenditure, I think that the resumption of economic activity across the country post-Covid and the resumption of labour-intensive sectors in various states meant that the income of migrant labour is also going up and their remittances back to their home states are increasing. I think we will see decent growth in rural consumption in the coming year. One challenge that we are facing is that the rural consumption mix is changing. I sometimes get this question—the quantity of fast-moving consumer goods is not growing very fast and does that mean rural consumption is not growing? Initially, we had a shock through Covid-19, where rural income was negatively impacted, and then it rebounded. When you come back from a negative shock, then a lot of this consumption increases. But when you have reached a particular level of normalcy, the income elasticity of demand for things like essentials, whether it is food, soaps, shampoos, or fast-moving [consumer] goods is probably not very high. I mean, you can’t take more baths because your income has gone up. To infer that rural income is not rising because fast-moving consumer goods have not moved fast may not be a valid inference. We have to also look at many forms of new consumption that are going on in rural areas. I believe a lot of gaming products are being consumed in large quantities in smaller cities and rural areas. But these don’t necessarily enter our regular anecdotal evidence or statistics. So, it’s a complex picture. I think we will see healthy rural consumption growth, if properly measured in the coming year.
Q: What is your reading on the external situation, because we have two wars, and the Red Sea crisis? How do you see it and is it a concern for India at this stage?
A: India is dependent on imported oil and natural gas and certain kinds of fertilisers, apart from other commodities. For us, anything that disrupts shipping is potentially adverse and a matter of concern. However, various international actions that are being taken are such that I think the consequences are likely to be manageable, especially from a budgetary perspective. We may see some adverse events, but I think they will be within a magnitude that can be handled within the overall fiscal balance that we have estimated.
Q: The rate on the public provident fund (PPF) has not changed and that is an issue for many people. What are your thoughts?
A: Everybody refers to the Shyamala Gopinath committee report, but I would say there is one serious lacuna in the interpretation of the report. We have found from our figures, that almost a vast majority of PPF subscribers are taxpayers or at least income tax filers. For a person who is a taxpayer, the real post-tax return on PPF can be as high as 12%. The yield to be benchmarked with government securities is the principal in the Shyamala Gopinath report, which the government had at one time accepted, but we increasingly feel that we have to look at post-tax yield. In terms of post-tax yield, government securities yield about 7-7.5%, but they are taxable. There is no tax relief on the income on government securities. So, there is complete exemption on the income from PPF. We are consciously recalibrating our view on PPF. It is a systemic correction and it should be seen in terms of post-tax yields rather than pre-tax yields. And in that case, the rate on PPF is already very high at 7.1%. For other small savings, it has been increased this year. But none of the other small savings instruments have a complete tax exemption on the income. Some of them have certain 80C benefits, but again, that would depend on whether you use the old system or the new system of taxation, whereas PPF income is completely tax-exempt. Technically, whereas the other small savings instruments are predominantly genuinely small savings, PPF seems to be primarily a tax-saving [instrument].
Q: Will the PPF scheme be revamped?
A: That is not under consideration.
@surabhi_prasad
This interview took place before the release of the Q3FY24 GDP numbers and the household consumption expenditure survey data