Budget 2018: Govt has to balance both fiscal and economic growth, says Bimal Jalan

When asked about the reports about government bringing back LTCG tax, he said any gain be it long-term capital gain etc are part of income and a tax can be applied. Moreover, if the economy is doing well and FII inflows are coming then the government can decide on LTCG tax.

Speaking about other issues like incentives to farmers, he said at all cost the farmers have to be supported – provide help to them in terms of investments, fertilisers etc. Along with this the government can also look at boosting infrastructure, he said.

According to him, minimum support price has to be in association with what the inflation rate is in agriculture sector.

Talking about financial resolution and deposit insurance bill, FRDI (which says deposits will be bailed-in if bank fail), he said it would not be right to use depositors' money as means of financing something by public sector or government, adding that it is much better to do it at aggregate level of government expenditure.

He said the government has already taken strong action for recapitalizing the banks for the benefit of the banks.

Below is the verbatim transcript of the interview.

Latha: One of the things which I believe economists have advised the Prime Minister (PM) is that time has come to impose a long term capital gains on shares. You have been there, done that, saw it being rolled back in 2004, what is your sense, is it time to impose that tax?

A: What I wanted to say to you is that so far as the specifics of this is concerned, on the long term capital gains tax and all that, I cannot comment on it. Let us see what happens.

Latha: I am not asking you to outguess the Finance Minister at all. As a concept only, as a principle, do you think this asset class should be taxed; we anyway tax short term capital gains, 15 percent, we have excused long term capital gains on equities – as a concept and as an principle is that something that the country should bother about?

A: As a principle any gain, long term capital gain, etc. they are part of the income and income tax can be applied. There are exemptions and there are taxes and rates of taxes differ, but if you want to include long term capital gains as part of the income, there cannot be two views on that; that is up to us.

Similarly, you can exempt. We have a lot of exemptions on different items and you can see how the economy is doing. If the economy is doing well, and if FII inflows are coming and that way as you have seen, the stock markets have boosted and so on, mutual funds are also advancing very fast. So the government can decide. However, it is an issue of at what point of time and when and this is for the government to decide.

Latha: The other dilemma or principle that perhaps the parliament and the executive will discuss will be which sector to boost. We have only that much money so is it infrastructure or is it farm focused. You have seen the government at close quarters for over four decades, where is the government best placed to boost, is it farm focus or is it infrastructure, where is the government expenditure effective?

A: The government infrastructure, I mean what you are saying about, so far as the farm loans are concerned, there can be no two questions or two answers to it. Yes, the farm loans have to be expanded, and the farmers have to be supported. They are the largest number of people in our country on the farms and if you have small farms and you can provide help to them in terms of investment or in terms of fertiliser, in terms of buying goods and services, then that is very good. Plus you can also do the infrastructure. What I am saying, the conflict between the two goals is not all that much; maximum you are talking about 0.1-0.2 percent.

Latha: But where is the government multiplier effect best? In your three or four decades of administration in government, where is the multiplier working well when government invests?

A: Naturally so far as the multiplier part is concerned, in the short run, loans to farmers and so on, they have to plant and they have to used that and the money and increase the agricultural production which also depends on rains and so on and so forth. So, if you want to say that from the government’s point of view, in terms of outcomes and so on, what you can guarantee or what you can call multiplier part, you talked about multiplier part, then obviously in urban areas the multiplier will be much higher than in rural areas.

What is the multiplier, multiplier is you invest and then somebody else you buy things, who buys things from somebody else, so that is the multiplier. So investment, urban areas, and the consumption part, etc. they are much more – from that point of view it is much higher. We should not neglect the farming sector from the poverty point of view for example. That is also very important. All the growth things that we talk about, the outcomes you talk about, are a means to an end. They are not an end in itself.

Latha: One of the points that the farmers have been asking is the implementation of the Swaminathan Committee’s one recommendation on minimum support prices (MSP). Here the Budget only allocate of course but raising MSP to cover over 50 percent of cost is what the famers have been asking. You think MSP needs to be jacked up?

A: I think the MSP has to be in association with what the inflation rate is in the agricultural sector or anywhere else. That part is important to take into account when we are talking about MSP and what the prospects are in terms of output of agricultural product. So, I would leave it in the sense that all these factors have to be taken into account. As of now, if you look at it, things are under control, inflation is not very high, and we have the resources to be able to finance any amount of agricultural products or agricultural inputs that we need for consumption or for investment.

Latha: The other question and I know you are traditional bias has been that growth in investment is more important than fiscal numbers or targets. However, we are just coming to this Budget on the back of yields having risen almost 100 basis points, probably more like 70-80 basis points in the last 12 months. Given that, would you still say that the Finance Minister should give capex more importance than deficit; that was your answer last time?

A: It is not a bias. What I want to emphasize to you is it is not a bias. I do not believe in a target by the way; that is important. We both want fiscal stability, we want financial stability, we do not fiscal deficit to be too high, but at the same time we want investments and growth. So the two sides of the coin, you have to balance them. The government would decide what to do and how to do it, in what way, emphasize at the moment to my mind that we should be able to do what we want to do both in terms of fiscal deficit as well as in terms of increasing outflows for investment.

The reason is simply this that – this is a personal view again that the second digit to a fiscal deficit is not of that great importance at the moment. Supposing that inflation, if you look at inflation and if you look at everything else, it does not matter all that much. Expenditure matters, there is money multiplier, that matters, yes, but 0.1 or 0.2 percent of fiscal deficit is not of great consequence. So let the government decide.

Prashant: We had the Niti Aayog Chief recently saying that heavens will not fall if the fiscal deficit is up by a few basis points and I think you are in agreement with that point of view. Are you saying that aggregate demand needs to be given a boost by government spending, is that what you are saying and the government needs to do that?

A: You have to start with the basics. Why is it that a country like ours needs a fiscal deficit target of the second digit? All of us want low fiscal deficit, all of us want that there should not be money supply or money multiplier should not increase very much, but in the Fiscal Responsibility and Budget Management (FRBM) Act we have laid down for three years a fiscal deficit target. So, that target has to be met or has to be given sufficient importance, that is true, but let us hope that after 2018-2019 all this would fade out and that we will be able to spend as the country desires to be spent consistent with inflation being under control, consistent with our need for investment and jobs to increase and therefore I don’t believe in fiscal deficit target, my personal view. However, now that we have a target under the act and passed by a legislation, we have to abide by it as far as we can and the government is doing precisely that.

Latha: Yes we have a target on fiscal deficit and on inflation, so, I guess both sides are in a sense tied up with their timelines.

A: From an economic point this is very important issue that why do we need a target for both inflation, fiscal deficit, growth rate, everything else. We want high growth but if you have a target of high growth rate to 7.67 percent, do you need that? 7.7 percent is fine, 7.5 percent is fine.

Latha: A final question on banking. There has been a lot of angst that taxpayer money is getting pumped into public sector banks and in large amounts. Your thought on this recapitalisation bond itself and do you think the time has come to question public ownership itself, whether some of it needs to be shed?

A: On public ownership here, I mean for example, public ownership of banks over a period of time you can decrease it and disinvestment process is started. However, public ownership of public sector banks in areas which are, for example if you have a public sector bank lending very high amounts to build roads, say, or to do things where the rates of return are not as high as they could be if they were lucrative, if they were short term investments, so you have to distinguish that part. In our country we need some banks which can take our deposit which are absolutely safe. You know you, I, and everybody else can go to public sector banks and we are not, in the sense that they are safe deposits so far as you are concerned or I am concerned.

Then the amount of money that can be spent on priority sector that also be specified already. However, if some things have to be done where the rate of return is going to be low but for the benefit of the people of India, for the benefit of the poor of India, then I think we have to accept that point of view that this is also our responsibility. I am emphasizing that point because don’t draw a quantitative line, two to three decimal points or two decimal points, yes, we want no fiscal deficit, we want high growth, we want very good investment.

Latha: Since you said safe deposits, where our deposits are safe, there is lately been this Financial Resolution and Deposit Insurance Bill which says that deposits may be pulled in if a bank fails, ‘bailed in’ is the word. Your thoughts on this provision of the bill?

A: There cannot be two thoughts on this that so far as the public sector banks are concerned we do not want this so called lean in or whatever and it is much better to do it at the aggregate level of government expenditure and try and keep it within control. However, if it has to be done by saying that the depositor’s money would be affected in public sector bank, that is not the right thing to do to my point of view and the government has taken very strong action for recapitalsation for example, for the benefit of the banks.

So that shows that this has very high priority. So I would not give any importance to the discussion that we are having in the media and elsewhere about deposits being used. There may be effect on the deposit which is adverse but that should not be the means of financing something else by the public sector or government.