INFRASTRUCTURE SPENDING HAS THE MAXIMUM BANG FOR THE BUCK”
The Economic Survey 2020/21 suggests that big spends in infrastructure and healthcare should be the government’s priority to speed up post-pandemic recovery. Debt, according to the Survey, is not necessarily bad if borrowing more means faster growth. The architect of the Survey, Chief Economic Adviser Krishnamurthy Subramanian, talks to Rajeev Dubey and Joe C. Mathew about the rationale behind the two proposals that have, in a way, defined Union Budget 2021. Edited excerpts.
Why did you propose a counter-cyclical fiscal policy? The idea is simple. Intrinsically, an economy always has its ups and downs. There are business cycles, peaks and troughs. If the fiscal policy is counter-cyclical what does that mean? When the economy is doing well and the private sector is also doing well, that’s the time when fisc (government spending) should take a step back. But when the economy is doing not so well and there is a slowdown, as a result of which the private sector is also not doing very well, the government needs to move in to fill the void. Result: Your peaks are not so pronounced, and your troughs are not that bad. It reduces the overall macroeconomic uncertainty. Lower uncertainty leads to greater investment. That is why a counter-cyclical fiscal policy is extremely important. In India, fiscal policy (historically) has not been counter-cyclical enough.
What kind of spending is most effective? Infrastructure spending has the maximum bang for the buck because it crowds in private investment. It is also based on fundamental economic principles. When there is uncertainty, people will not spend on discretionary items. Corporates will also say let’s wait for another fivesix months and see how demand is going, before making an investment decision. So, the recommendation is that the focus on infrastructure should be continued and accelerated. The second is healthcare. An example is the outlay on vaccination. It will be something that will be really good for the economy as well, because as more people get vaccinated, contact-sensitive sectors like tourism will get a boost. Once they are vaccinated, people would want to go on a vacation, go for a massage, and lead a normal life as it was before Covid-19. Those will lead to such sectors, where there is pent-up demand, come back with a vengeance. Vaccination enables that.
You say it’s a V-shaped economic recovery. Several others say it is K-shaped, meaning the recovery is not across all segments, but skewed in favour of the rich. Do you think economic revival has benefitted everyone?
On August 31, after the first-quarter results, we had mentioned by looking at high-frequency indicators that a Vshaped recovery was on. We have been talking about recovery of macroeconomic indicators. We are glad to note that the particular assessment has come true. Also, as the Prime Minister himself has been saying, there has been a series of mini-Budgets. India has responded (to the economic shock) in a calibrated manner. The government has responded to identified areas that needed intervention, and provided that not just at the macroeconomic level, but also within pockets. For instance, the free-food programme has been, by far, the largest possibly in the world — 800 million people were given free food. For vulnerable sections, there was direct benefit transfer as well. So, overall there has been a clear V-shaped economic recovery, besides the steps taken for vulnerable sections. As information comes in and we identify areas that need intervention, we will continue to address them till the time we are completely out of the pandemic situation.
You have recommended debt for infrastructure spending. What is the ideal debt situation? How
much should we borrow to make a difference? If I as an individual, or a company, or a nation borrow and invest and generate returns greater than the rate at which I borrow, then it’s worth it. The return is actually greater than your cost of borrowing. That’s the idea. Now, when the economy is facing headwinds and the fiscal policy does the necessary spending to bring back growth, then it becomes self-financing. So, the directionality is what is more important. If you get growth, then debt sustainability actually comes. Even in the worst-case scenario, if we have a real rate of (GDP) growth of 3.8 per cent each year from FY23 till FY30, you will still have debt decreasing. That is because interest rate is less than nominal growth rate. Also, the measures announced in the last Budget — the special category bonds, a part of the global bond indices — will bring in a lot of supply as well, and thereby enable borrowing. This year, borrowing has been at a historical high and when we have been able to pull it off without any global support, this one should not be a problem.
Our interest payments as a percentage of total expenditure are about 18 per cent. The debt that we raised last year was about 20 per cent of the rupee that the government collects. We are almost raising debt to pay off interests. Is it like a credit card roll-over situation?
No. If you are actually borrowing at 6 per cent, you invest it in the economy and the economy gives you a return of 12 per cent, let’s say of nominal growth, then rolling over that debt is not a problem. Instead, it is something that is advisable.
Is printing money an option?
The important point is to do the necessary spending to implement growth. Extraordinary times can accommodate extraordinary measures.
What should be the increase in capital expenditure, say as a percentage of total expenditure? Directionality is what is important. This is the time when there should be greater spending. That is already seen in the capex for October, November and December.
What made you think of coming out with a Bare Necessity Index?
When I came back to India, I travelled through the hinterland. I wanted to see if the data supports what I have seen. So, we used the NSSO survey data for 2012 and 2018 (to map the change). All these bare necessities like drinking water, sanitation etc are good economics, which translates into good politics.
You are calling for real innovation. Are there enough sops for R&D?
If you take the gross expenditure on R&D, look at the spending by the private sector and the government, and compare it with the top 10 economies, you will see that while the private sector accounts for 36 per cent in India, it is 68 per cent in advanced economies. The government does about 60 per cent in India, compared to 22 per cent in advanced economies. Innovation has to happen to be competitive. The private sector needs to say let’s innovate so that we become world leaders. When the IT and BPO sector was booming, they just kept that cash. That was the time to invest and generate the next WhatsApp. You had the tax incentives too. But it’s the mindset that is required.