MC Interview |In signal to India Inc, DEA secy says need infra investment of up to 8% of GDP every year

Growth for the current year is seen at 6.4 percent, which is the best estimate available at this point in time. Now, there are uncertainties external to our economy, on which we have little control or influence. But what is in our hands is to take care of the domestic parameters to the extent we can nurture our strength and mitigate our weaknesses in the softer areas in our economy and that is what this Budget tries to do.

Number one, facilitate more credit to productive sectors. So, that's why the emphasis on MSME, wherein a part of the risk of lending to them is taken to those pools which worked very effectively during the COVID period through the ECLG mechanism, and that was a huge success. Similarly, how do we increase credit for MSMEs? Of course, there are certain of concerns, credit that is not backed by any assets, that is a separate task, that is a stability issue.

Second part is that higher food inflation is also getting in the way of deciding what should be the policy interest rate into the economy. What the fiscal side can do is try to address concerns on the food inflation side, not just by doing more imports, which government of India has been doing for some of the items, but we know these two or three items are contributing hugely to food inflation, which is pulses and edible oil, at times both are contributing, at times one is contributing. Of course, on vegetables and fruits, we can't import, but that is something more of a cyclical and a supply chain issue. So, this Budget tries to address that piece because, again, it takes care of the food inflation and thereby gives an uncluttered plate for monetary policy to play.

Then there are more medium-term measures, which may not have any impact on whether we are at 6.8 percent in the next fiscal. This is around how we organise ourselves in terms of inspections and compliances, which are a more low-hanging fruit rather than a deep reform. There is an attempt going into those areas as well.

Does the Budget give a broader message — the government has done the heavy lifting on capex and now it is the private sector’s turn to step up?

There's certainly a message and the message has come out even in the July Budget last year. Having brought government capex to a level of more than 3 percent of GDP, there's a limit up to which it can be increased. The July Budget mentioned that government of India has brought it (capex) to a very high level, and moving forward the attempt will be to maintain it at that level relative to GDP.

And, the effective capital expenditure, including grants and capex-linked loans to the states is actually at Rs 15.5 lakh crore, which is 4.3 percent of the GDP. Now on the one hand, when fiscal deficit is at 4.4 percent, and effective capital expenditure is at 4.3 percent, where is the space to increase it further, unless we say that we are in a revenue surplus position.

The government’s capex has reached its potential but it should not go down, in a relative sense it's not going down. But the expectation is that the Union government is spending 3 percent, while states are pitching in around 3 percent on their own. With regard to the private sector, it is the government’s responsibility to create opportunity through bankable projects.

So, we have made an announcement that each ministry should come out with a shelf of projects ready for PPP (public-private partnership) over the next three years. There are sectors like telecom, ports, airports, wherein 80 to 90 percent of projects are getting financed out of private capital. Even in the roads sector, at least 30-40 percent of private capital is coming in. But sectors like urban infrastructure is not even attracting 5 percent of investment through private capital. Railways is yet another where we have not attracted private capital. These are the areas and some newer areas like say social infrastructure where we need more private capital. PPP is how the infrastructure story has to go on. We need more investment in infrastructure in the order of maybe 8 percent or 9 percent of the GDP every year and sustain it. And, it is not only about investment in physical infrastructure. It is also investing in people and that brings in a sharper focus. This requires attention both in terms of policy and in terms of the programme and this Budget tries to bring in that concept.

How do you plan to achieve your debt-to-GDP glidepath by 2031. Are lower market borrowings a way to meet this aim?

Fiscal consolidation has two purposes. One is that the government is spending a very significant portion of its revenues for interest payments. That means its ability to meet the current needs and the future needs gets highly constrained. Now today with what about Rs 12 lakh, 13 lakh crore of interest payment vis-a-vis what the total revenues are, that is a fairly large number. That has to be brought down. Nothing can be done by borrowing less this year because there is a huge stock issue. One has to bring down that stock. Only then the interest payment relative to revenue can come down. It will take a number of years.

The second purpose is that which is a flow issue. If government is borrowing too much from the economy say in the current year, that means less money is available for the private sector because the savings pool is limited. Savings augmented by foreign capital may come into the economy. Now how do we propose to do it? Just look at what the road map has been suggested. Three scenarios for the growth rate, nominal growth rate, 10.5 and 11 percent.

Then three possibilities of consolidation — mild, moderate and high. In a year where economy is doing well that means support from the fiscal for stepping up public expenditure may be less. Consolidation can be more. If we say in a year where the economy is not doing too well or economy requires more support from the fiscal expenditure, in that year consolidation can be moderate or it can be a mild consolidation. But for sure if fiscal deficit remains 4.4 percent, we will not reach a debt-to-GDP ratio of 50 percent. So, we have to choose between the three. The three scenarios give a flexibility to the government that every year from now, we can lower our debt-to-GDP ratio from 57 percent currently over the next six years.

Just look at the manner in 2021 when the fiscal deficit had become 9.2 percent. So, what the finance minister had committed by 2025-26 from 9.2 percent, it will come down to 4.5 percent, which has been done. The same thing will play out here as well. But instead of fiscal deficit, the primary driver, the primary parameter will be the debt-to-GDP ratio. But each Budget will have a fiscal deficit number and, it should be on a declining path as well.

The earlier FRBM target of 3 percent is not on the table anymore then?

When the economy is recovering, a sharp fiscal consolidation can be counterproductive. It has to be in a gradual manner. Yes, our debt level is high and as a consequence, our flow also, how do we bring down the debt level by controlling our flow? It has to come down but before we reach an ideal situation, first we have to bring down the debt and the fiscal deficit to a more moderate level. We are some distance away from getting back to say a 40 percent debt-to-GDP ratio and a 3 percent fiscal deficit target. (edited)

Are you hoping for a rating upgrade in the next fiscal?

I would not jump to that. I would not get into that expectation. We feel that we have been doing a very credible consolidation path. Ratings agencies have their own way to look at it because they don't just look at meeting the needs of today. They also look at what if there is another crisis happening? What if the global headwinds were to become stronger? What impact will it have? But through a very careful or rather a constructive engagement with them, a number of them have upgraded our outlook from neutral to positive. We expect that process will go on. And the very fact that our fiscal deficit is reaching 4.8 percent this year and 4.4 percent next year also strengthens that narrative. And I am happy that engagement (with ratings agencies) remains constructive.

Are you leaving space for fiscal expansion if global headwinds intensify? Is that what you are saying in terms of the gradual decline in debt-to-GDP ratio over the next six years?

No, not fiscal expansion, if you mean increasing the fiscal debt by that term. The question is whether we are doing consolidation in a mild manner or we are doing in a high manner. So that is the difference which is coming up.

Has the finance ministry done a preliminary analysis of the impact that Donald Trump’s tariff policies may have?

See my approach on this aspect is that there are factors which are in in our zone of influence and those that are not. External uncertainties are arising because different nations take decisions, which they feel are in their own interest like we do. All our policies are what we believe is for the good of the Indian economy, Indian people, that's how we take the decision. So, another jurisdiction takes a similar decision. How do we deal with those uncertainties? Again, by making our exports more competitive, better quality and that's why this Export Mission has been brought in. Of course, this will have results over a medium term, and not within a year. I am not looking at it in the scenario of what any other jurisdiction will do about it. We have to work towards increasing (exports) competitiveness.

Even the idea of putting more money into a very specific scheme on footwear, it was done to meet employment goals as well as that because it has a large potential. India has a strength in cotton production. But we find that our own cotton productivity has not grown, it's rather very, very stagnant. So, the idea is to address that concern because we have to regain that space.

Was the export push in the Budget a reaction to rising protectionism across major economies?

No. This is in the context of a larger narrative that global growth is likely to be very moderate over the next couple of years. Global trade growth rate will also be very modest going forward in that year. So, in an expanding global market, it is easy to create a space for ourselves, but in a market, our efforts have to be doubled up to create that space.

Irrespective of Trump’s trade policies, do you think India's tariffs could become more competitive? We could lower some of our tariffs in certain sectors. Do we have room for that?

Yes, a tariff policy is an integral part of any trade. In this Budget, several of the custom duty rates have been rationalised. The numbers have been reduced but the idea is that wherever possible, wherever we have the competitive advantage, we have to try and be self-sufficient in those areas. But only in the areas where we have the competitive advantage. If we don't have a competitive advantage, we'll continue to import. Till we get that advantage, we will have to import. That is how that rational economic policy will move into that direction.

Does Trump's recent warning to BRICS members on their proposal to introduce a common currency hinder India's plans to internationalise the rupee or use it to trade with other countries?

The aim to internationalise the rupee is not to get away from the US dollar. When India is trading with countries that have a trade deficit like India and then these two countries are willing to trade in their local currencies of their own by invoicing, it is not moving away from the US dollar. Because at the end of the day, whatever is the net balance, they have to settle it in a foreign currency, which will be in dollars. So, it is a question of learning the ropes or getting more acceptance happening in those areas.

Now Sri Lanka is willing to accept Indian rupees, so then we can want to invoice it in rupee because they are earning rupee. Our tourists go there, instead of spending in Sri Lankan rupees, they can spend Indian rupees and those rupee resources are used then to import from India, so it helps us and it helps them.

What about free-trade agreements? We have done a few. There is one with Oman which is in the works. Would the bigger ones with the UK and EU also help in terms of increasing exports?

That attempt is still on but I will not be the right person to comment on a free-trade agreement. But the Budget has a clear announcement on bilateral investments. And since the announcement in the interim Budget in February last year, we have signed two BITs (Bilateral Investment Treaties). Based on our conversation with major economies, it gives us a lot of confidence that there is a need to revisit the 2014 template, make it more investor-friendly, at the same time take care of some of the legacy issues, which we were facing in 2014. So that is the signal. Not a signal but a real exercise to be done. Anyway, the UAE (United Arab Emirates) agreement, which is in the public domain, we have moved significantly from the model of BIT of 2014.

What changes are being contemplated in terms of investor-friendliness?

There were a few pain areas which are unintended consequences. The first case which we never realised will arise was because of a trade principle brought into BIT, which is an MFN (most favoured aation) clause, that if you have offered a better term to anybody else, the same will get offered to others. And even today, we do provide for some preferential treatment in terms of the investment. So, that is not an issue when we deal with any bilateral partner. We say, okay, let us look at what your investors are looking for, in terms of production, in terms of the policy certainty. And past issues like Vodafone happened because of the retrospective taxation. We don't believe in that any more. Those are special circumstances, I will not get into that. Look at the conduct of our policy, there is no retrospective being done, especially if it were to be adversarial to that taxpayer. A number of cases come not because of the action or inaction of the Government of India. A number of disputes arise because of what the state government should do.

The pace of policy changes may be an issue, some have to move faster than the others but more protection can be provided, can be made more user-friendly.

One big piece which was missing, which was not there earlier, is looking at only an enterprise-based definition, which is an FDI (foreign direct investment), one has to have a presence in India, only then one can get a protection versus somebody who is coming to the market through an FDI. So, in UAE itself that has been opened up but not for everything under the sun. On a pre-agreed items, what will come? Whether the brand value is covered or not, is a matter to be decided. But when it comes to, say, coming through an FDI, and again that is a broad approach, I am without getting into the specifics there. So, what rate at what price one will exit, etc., it is determined by the market. Whereas a brand value is an assessment by the brand holder and some market participants, not a market partner, some assessors who are doing it. So, that is a more opaque area. I am just giving an example, that what should be the asset wherein protection can be provided.

The commitment in this Budget is to revisit the 2014 BIT, make it more investor-friendly, so that we can attract more investment, especially into manufacturing. We have been getting a significant amount of FDI on our services sector, on our IT sector. Manufacturing is something we really have to attract a lot more FDI.

The finance minister talked of two committees which will look at deregulation in finance and non-finance areas. Can you give us some idea about their timelines and composition?

First of all, this area of regulations, compliances, certification is a very wide area. And it was felt that the financial sector, non-financial sector, these are two different segments, they cannot be dealt in a reasonable period of time by one body.

When it comes to the financial world, there is already an existing institution in FSDC, which is chaired by the finance minister. All regulators are members there. So, within that FSDC, a mechanism will get created, to get into the issues around it. But the idea is, to make all our compliances, inspections, more suited for the present needs.

When it comes to the non-financial world, yes, what has been announced is a high-level committee. And we do expect the details of the terms of reference and composition will be brought out very soon.

The nominal GDP growth has been pegged at a lower 10.1 percent for FY26. What is the assumption on the deflator?

The band in which we see the real growth is between 6.3 and 6.8 percent. This is a practical assessment at this point of time. It is the best assessment, which is possible. Though we will feel that perhaps with some of the measures being announced and if the external headwinds don't become stronger, perhaps we can be nearer to the upper limit rather than lower limit.

The deflator we are looking at is certainly below 4 percent. Even if you look at what the deflator now, it is much less. We don't expect any pickup in the inflation, either in the CPI (consumer price index) or in the WPI (wholesale price index), to make the deflator more pronounced in the coming year. But we had assumed nominal GDP of 10.5 percent for the current year and now we realise that it will be lower. So that the fiscal deficit number and debt-to-GDP ratio don’t vary from what we assumed, it was felt that we should be conservative and assume it at 10.1 percent for FY26.

The department of economic affairs was expected to come out with a discussion paper outlining the government’s stance on cryptocurrencies. When can we expect it?

The committee, which was formed on cryptocurrencies, had done this work but then we find that a number of jurisdictions, not just one jurisdiction which is in the news, now have changed their stance in terms of how they view crypto and also in their uses, and that prompted us to revisit the questions that were being put up for discussion because this is an asset class that which does not believe in boundaries.

Asking a question, when the world has moved on, we won’t get the right answers, we will get answers that won’t be relevant. So, we are doing that recalibration but we expect to complete that exercise and come out with the discussion paper. We are factoring in additional questions that need to brought in in terms of the new stance that different jurisdictions are taking. So, the discussion paper will factor in additional questions which have to be covered in terms of the new stance which different jurisdictions are taking.

Each sovereign takes decisions in the interest of their country. We have to be clear that a developing country can't have the same stance as a developed economy. Stable coins will have a different risk for us than what it may have for another country. That we have to be very conscious about. So, it is not just because another jurisdiction is taking a view, we should just adopt that view.