‘Concern regarding fiscal deficit is real’
Outgoing Finance Secretary ASHOK LAVASA would be remembered as a bureaucrat during whose tenure the Narendra Modi government implemented demonetisation and the goods and services tax (GST). Days before his retirement, Lavasa tells Arup Roychoudhury & Megha Manchanda there is still lack of clarity regarding GST proceeds for this year and, hence, the fiscal deficit target is being watched closely. He, however, ruled out any fiscal stimulus this year. Edited excerpts:
The government’ s bank re capital is at ion plan has been received well. But there are problems from the demands ideas corporate houses are not taking fresh loans. What can the government do to spur demand?
There are a few things that we can do and have done to boost demand. Essentially, the government policy is about creating economic opportunity for the private sector to tap. If we have announced a Bharatmala, which will entail ~7-lakh-crore investment, clearly there is space for two types of private participation— contractual and investment. Both would require funding from banks. Contractual may not require so much of lending support but the PPP (public-private-partnership) projects need support. When these projects are rolled out, obviously there would be a demand push.
Secondly, the ToT (toll-operate-transfer) model or monetisation of road projects is a soft model where there is an opportunity for the investors. In this case, the government is substantially taking the kind of risks these projects have faced in the past. There is no risk of land acquisition, getting regulatory clearances, construction, etc. All the risks associated with the execution of road projects have been addressed. Many projects in the past have suffered because of these risks. The only risk the concessionaire now has is the market risk in terms of traffic.
Is the investor coming in now when the problem of twin balance sheets still persists?
Where risk perception is low, the appetite for investment would be high. Many investors do not want to enter the business of actual construction. For them, these are good opportunities.
Initially, banks were wary of lending to concessionaires as they felt they were not pumping in enough equity on their own. With recapitalisation, will banks take the risk?
Whatever due diligence is required has to be professionally followed. It has to be rigidly followed because you need to avoid the recurrence of such problems.
Since these projects are softer projects for investors who do not want to take too much of a risk on regulation and actual implementation. The 84-odd road projects that have been identified have a monetary value of ~34,000-35,000 crore. The nine projects that have been bid out are about ~6,000 crore. But depending on the response you get from the market, the value will fluctuate. And, the NHAI (National Highways Authority of India) might be encouraged to accelerate this process in case they get a good response.
At present, the NHAI is spending a lot more time on project preparation activities before it actually asks the investor to take over. It is quite clear that this recapitalisation is not going to increase the appetite of those that are under stress, the corporates that are overleveraged have a different problem to deal with. Meanwhile, the global recovery is a lot better than what was anticipated, and that in turn will create more opportunities.
Apart from roads there are other sectors where investment needs to pick up and lending is to be increased, what more can the government do? In the MSME (micro, small and medium enterprises) sector, there is data to indicate that in spite of the stress that the banks were under, the corporate (houses) were accessing capital from the market. So, there is appetite as far as some corporate (houses) are concerned, but they are going to the bond market for a variety of reasons and one of them could be that the banks are not able to lend. The universe of potential borrowers is that one category is overleveraged; their problems have to be dealt with differently. But the other categories that have an appetite can now come to the banks when they are in a better position to lend.
Related to that is the entire MSME sector. It is clearly one of the focus sectors of the government. The Centre, in consultations with banks, will take measures to direct a lot of credit to the MSME sector. The other thing is that what can be the sector-specific decisions that will boost demand in those sectors. Textiles, leather, food processing. I think there is a lot of interest and appetite in India and with this change in mood, things should pick up.
Critics are talking of jobless growth. The MSME sector, a driver of job creation, has taken a hit after demonetisation and GST. What are you doing to ensure jobs pick up? One significant announcement was made with regards to Trade Receivables e-Discounting System; that will help. It is an important decision in favour of the MSME sector, as they are struggling with working capital. Other than that, there is the credit guarantee fund that the government has set up, then the interest subvention scheme, these policies are in place.
The government is laying thrust on tapping the capital market for raising funds for the infrastructure sector but we are told that the finance ministry may reduce budget for some infrastructure ministries. Is that right? Normally, the finance ministry would reduce allocation for a particular ministry depending on the expenditure made by it. It has nothing to do with the government’s priority. If a department says that in a given year they have been able to spend X amount of money but have committed investments going ahead, we don’t insist on a cut. We have many public sector undertakings that are highly underleveraged, and we feel there is a case for them to go to the market, raise money to undertake development activity. That in itself gives demand a push as far as credit off-take is concerned. We have been insisting the CPSUs (central public sector undertakings) to meet their development requirements by accessing banks to the extent that their balance sheet permits. Now that the NHAI has international ratings in place, it is empowered to raise money on its own at a good interest rate. Would the government look at lowering its budgetary support to the body? Why not? If you are looking to augment your overall resources for capital expenditure, why should we unnecessarily restrict one stream of resources.
Every year there is some saving on spendings, especially in capex. Most of that comes from the defence ministry. This year, do you expect more saving in capex, or a cut of any sort? A recent research report by SBI suggests that the government may cut capex by ~70,000 this fiscal year… We have already spent almost 50 per cent of capital spending. We don’t intend to curtail capital spending, but there needs to be prudent financial management. There is no point giving money to somebody who does not have the capacity to spend. Why should precious public resource be parked like that?
Are you saying your budgeted spending estimates next fiscal year for the roads ministry and the NHAI would be lower? We should look at it this way: The total capital expenditure will be higher. We are not saying we will reduce. What we are saying is: If we are giving you X amount, please leverage it.
There is a larger issue with fiscal deficit now. By issuing recap bonds, you are taking on debt. Then there are concerns regarding GST proceeds and your spending obligations for the rest of the year. Are we looking at a fiscal slippage? And how will that affect the future fiscal road map as mandated by the FRBM panel? The concern regarding fiscal deficit is real. The concern arises from the fact that given the pattern of GST receipts, we will be recognising 11 months of indirect taxes this year. Out of which eight months will be GST, instead of nine months since March returns cannot be recognised immediately. That is an area of concern. I think it will take another couple of months for the Department of Revenue to estimate receipts from GST. The trend, so far, indicates that they are close to what they were anticipating. But in terms of IGST constituting some component of this, I think in a couple of months they will have a better sense of what this IGST amounts to as far as government receipts are concerned. These are the issues because of which we have to look at our revenue stream this year.
On the expenditure side, are their chances of higher-than-budgeted spending or a fiscal stimulus? The economic affairs secretary said on two occasions that the government would re-assess its borrowing and fiscal position in December… I don’t think anybody is talking of a fiscal stimulus. What we have spent, so far, is increased public spending year-on-year. I don’t think that we are thinking of any further fiscal stimulus. This year, particularly, we have to very closely watch our fiscal deficit.
The Budget process has begun. While these are still early days, what can we expect? It is too early for me to tell you what the focus of the budget may be. If you look at the past 3-4 Budgets, the government has been pretty consistent with its spending priorities and expenditure patterns. Bulk of the spending will have to be in sectors where you are targeting completion next year. We are talking about the flagship schemes. And, fortunately, those schemes are doing well in terms of execution.
Fiscal deficit for April-August was 96 per cent of the full-year target of ~5.46 lakh crore. How big a concern is that? Where are we for April-September? My view is, and this is borne by past experience: These monthly deficit numbers don’t matter much. Revenue has a certain pattern. Receipts and expenditure patterns don’t necessarily match. Especially in a year where there is front-loading of expenditure, the initial picture of deficit might appear to be what it was larger in the past. But that is not a pointer to how things will end. From August, September deficit has come down because of higher revenue. For April-September the fiscal deficit was 91.5 per cent of full-year target.
“THE CONCERN REGARDING FISCAL DEFICIT IS REAL. THIS ARISES FROM THE FACT THAT GIVEN THE PATTERN OF GST RECEIPTS, WE WILL BE RECOGNISING 11 MONTHS OF INDIRECT TAXES THIS YEAR” “WE DON’T INTEND TO CURTAIL CAPITAL SPENDING, BUT THERE NEEDS TO BE PRUDENT FINANCIAL MANAGEMENT”