Once a central banker, usually a central banker, at least when it comes to decision of words! It is apparent every time you listen to Dr C Rangarajan. Like a accurate dyed in the wool central banker, he also eschews hyperbole, is usually measured with words and tends to stick to numbers. But fortunately, in contrast to most central bankers, who may well opt to speak but nonetheless not convey a lot, it is probably the economist in Dr Rangarajan that gets him to share his frank views on points that concern him and the nation.
In his instant reaction to the final Union spending budget, speaking to TheSpuzz Online, he was pleased that the composition of government expenditure has changed in favour of capital expenditure (study: towards asset and job creation) although the quantum of expenditures is not seeing a substantial modify (if one have been to evaluate the revised estimates for 2020-21 and Budget Estimates for 2021-22).
Correction soon after a steep fall
To him, the essential regions for concentrate now are on stimulating development by attracting investments (each domestic and foreign) so that soon after the coming year which as he puts it, will “with 9.5 per cent real GDP growth do the correction after a steep fall” , measures are taken to make sure that post 2022, there is at least 7 to 8 per cent development. “The point really,” he says, “is that we are talking about a growth rate in the coming year on top of a year that was very bad. Or take the two years together (the current year and the next) and we are talking of a growth rate of about 3 per cent over two years (one year decline of 7.7 per cent and in the other a growth of 9.5 or even 10 per cent).”
But then, even as the concentrate has to be on placing in spot policy enablers now to attract these sorts of investments, staying watchful to measures getting taken to make sure fiscal prudence will also be essential. Afterall, he points out that the government has itself been saying that it intends to bring down the fiscal deficit overtime. “In fact, it has already indicated that by 2025-2026, bring down the fiscal deficit to below 4.5 per cent of GDP. Therefore, we need to see at what speed it will bring this down and the timeframe to bring it down further to 3 per cent of GDP.”
To Dr Rangarajan, a clear road map (amongst now and 2025-26) on fiscal consolidation is essential. The finance commission, he says, “has also said that an inter-governmental body can be set up to re-examine the whole issue of the road map on fiscal deficit.”
Interest payments
Critical in this journey is also the way the government decides to view its method to debt and interest burden. Take interest payments for instance. These have traditionally been a substantial component of the government expenditure but the spending budget documents this year get in touch with it the “the biggest item of expenditure of the government.” In the revised estimates (RE) for 2020-21, the proportion of interest payments against total income receipts has been revised to 44.6 % from 35 % soon after this revision. In FY 2021-22 income expenditure on account of interest payment is budgeted at `8,09,701 crore which is 45.3 % of the total income receipts.”
The distinction amongst the total income receipts (each tax and non-tax income) and the interest payments provides a fantastic indicator of how a lot of the income receipt is accessible to the government soon after creating the interest payments. What requires to be watched now is what the actual income receipts will be whilst maintaining in thoughts the tough to ignore reality that the interest payments element is pretty higher.
Liquidity & Inflation
However, the spending budget document says, “the interest payment is expected to come down in the medium term because of availability of liquidity in the market, and RBI’s accommodative monetary policy.”
On this Dr Rangarajan cautions that “an accommodative monetary policy can help bring down the interest rate but there are limits to which such policies can be sustained overtime as the rate of interest cannot be kept artificially low by pumping in liquidity because it will then result in higher inflation.”
The price of interest, he feels, will in the end have to be decided by the extent of borrowing the government is creating. Therefore, the government will have to work towards a policy of borrowing much less. The rationale getting that the debt beyond a point can be terrible since the payments towards servicing the debt turn out to be rather heavy. The interest payments as a proportion of income receipts are currently pretty higher in India.