Need to replace useless subsidies with infra spending: Basu

In an exclusive interview to CNBC-TV18, Kaushik Basu, the chief economic advisor accepts that there is no way that India will make it to the targeted fiscal deficit of 4.6% of GDP. It was just last week that the government made additional unscheduled borrowing of Rs 11000 crore over and above the budgeted amount for the first half of the fiscal. Supporting the move, Basu says that government overspending does happen in times of recession. “However, there is an urgent need to replace useless subsidies with infra spending,” he urges.

Basu says that volumes on food subsidies need to be decided by the delivery systems. Despite the current leakage scenario, amount of food subsidies have been projected and it is not grossly underestimated, he says.

On petrol price hike and deregulation, he says that he is unaware and there is no way to find out if the oil marketing companies were told to not hike cost. “I however can't agree that there is mockery of petrol deregulation,” he says. In fact, he believes that diesel should be deregulated too.

While the Central bank chief has signalled a reversal in monetary policy, Basu says that the pace of interest rate reversal is risky business.

Nonetheless, he expects growth to see an uptick in Q4 and it is likely to continue expanding all of next fiscal, he says. “But I don’t think we will reach 8.5% growth rate next year,” Basu says.

Below is the edited transcript of Basu's interview with CNBC-TV18. Also watch the accompanying video.

Q: The big worry on everyone's mind is the fiscal deficit number. Its been clearly acknowledged now by the government, Prime Minister, Finance Minister and other officials from the finance ministry that 4.6% is not achievable. What do you likely believe is going to be the fiscal deficit number?

A: I am in the ministry of finance, too close to the number to give you a number. We will not make 4.6% number and there will be some slippage. I don't know what the figure will be. However, we have to keep in mind, when you miss a target that you set for yourself, you don't feel proud of it. But, the world economy deteriorated through the year very steadily.

When we were doing out budgetary exercise in January, even early February crude price was nowhere near where it got to finally, so, we know why it deteriorated. In today's global scenario where there is a tendency for a recession all over the world, most countries are slowing down or cutting back on their fiscal deficit because one of the things you do is use the fiscal deficit to pump up the economy.

Q: I get the fact that in recessionary times governments do over spent, but we are not spending on infrastructure or building infrastructure for the future?

A: That is a criticism I was going to make. The point about overspending, I don't think is a valid one. A certain amount of overspending happens in these situations. I am willing to take the criticism that we have to work very hard to make the components elements of the fiscal deficit, which lead to future growth, higher productivity, infrastructure instead of wasteful subsidies.

We have to work very hard to curb that. I want to clarify that by wasteful subsidies I don't mean important things like food, health, education, our government will of course spent on these things. We have to cut down on many other areas where we fail to get a subsidy and we lose out.

Q: Why the market is so worried? Even if you say that the slippage will be marginal, people don't seem to be buying that argument because just look at what is happening on the oil subsidy front. There was a meeting of the oil marketing companies today. We understand that a decision to hike oil prices, even though there is Rs 2 per litre under recovery on Petrol prices has been put off again because of political reasons. So if you just go by one subsidy bill the market has genuine reasons to be concerned that you are going to perhaps significantly overshoot?

A: The extent of overshooting is not what I was commenting on, but I was talking about the components of that overshooting. I would be concerned if those components were wasteful. I don't know the inside story as far as the petrol price issue is concerned, whether it is that the government has signalled these companies not to hike it or because Brent is at USD 109 and our own is 107 and the exchange rate which didn't appreciate but it is more or less holding around Rs 53. So, nothing incredibility new has happened over the last week or so.