Informist, Tuesday, Feb 7, 2023

By Krity Ambey and Priyansh Verma

NEW DELHI – The government's failure to meet its disinvestment target year after year could perpetuate the "fiscal crisis" that India is going through due to a low tax-to-GDP ratio, says economist Rathin Roy.

"This Budget (2023-24) has managed the fiscal crisis; it has not solved or resolved the fiscal crisis," Roy, managing director of the London-based Overseas Development Institute, tells Informist in an interview.

The Budget has projected a tax-GDP ratio of 11.1% for 2023-24, down from 11.4% in 2021-22.

"I think the government seems to say politically that we will not be able to raise the tax-GDP ratio by too much, so what we will do is we will embark on the massive programme of disinvestment. But that is a failure," Roy says.

The lower tax-GDP ratio and the consistent shortfall in disinvestment receipts means the fiscal crisis continues, he adds.

In the last 10 years, the government has missed the disinvestment target on eight occasions.

According to Roy, the Budget for 2023-24 has made modest estimates, matching the modest revenue and disinvestment capabilities. 

"The government is not able to collect the revenues they project, so in order to keep borrowing under control, they keep cutting expenditure. So the expenditure-to-GDP ratio today is lower than it was before the pandemic, and has been continuously falling," he says.

The Budget has projected the expenditure-to-GDP ratio for 2023-24 at 14.9%, down from 17.7% in 2020-21.

Following are edited excerpts from the interview:

Q. You have been talking about a silent fiscal crisis because of a low tax-to-GDP ratio. Any improvement on that front?

A. This Budget has managed the fiscal crisis; it has not solved or resolved the fiscal crisis. Why do I say that? If you look at the aspirational tax-GDP ratio of this government since FY16 (2015-16), it was above 12% of GDP. They never met this aspiration. So, two years ago, the government reduced its aspiration and brought down the target, so they are meeting their lower target now. But this lower target means only 11.4% of GDP is coming to the government in the form of tax and non-tax revenues. That's pretty low for the ambitions the government has – capital expenditure, welfare spending, etc. So, I think the government seems to say politically that we will not be able to raise the tax-GDP ratio by too much, so what we will do is we will embark on the massive programme of disinvestment. But that is a failure. 

For this year, they claim in revised estimates that they would've divested 600 bln rupees. I challenge this claim because the total disinvestment till date is 387 bln rupees, how are they going to double the disinvestment in Jan-Mar? I am afraid that again, they will give us a false revised estimate. What happened in FY22 will again happen.

This consistent shortfall in divestment receipts combined with lowered modest revenue targets mean the fiscal crisis continues. The government is not able to collect the revenues it projects, so in order to keep borrowing under control, it keeps cutting expenditure. So, the expenditure-to-GDP ratio today is lower than what it was before the pandemic, and has been continuously falling. Next year, it is projected to fall by 0.4% of GDP, which is the projected fall in the fiscal deficit. Effectively, you're cutting the fiscal deficit by cutting expenditure.

Q. You say the government is adopting expenditure compression, not revenue expansion, as the prime method of consolidating fiscal deficit. But the compression has mostly been in consumption expenditure. Isn't that the right way to go?

A. Yes, that's the good thing this government has done. It has compressed discretionary government expenditure and that's good fiscal practice. Before the pandemic, almost 75% of our borrowing was for consumption. Now, if the government does what it says it will do, next year for the first time since 2006, consumption borrowing will be less than half the total borrowing. But that doesn't mean that because the government has increased the share of capital expenditure in borrowing, that has increased capital expenditure.

Q. In your latest column, you pointed out that the estimated combined capital outlay of the Centre and central public sector enterprises account for 3.9% of GDP in 2023-24 – the same as in 2019-20. So, are you saying the mega capital expenditure push celebration is hollow?

A. It's a bit childish to celebrate big numbers. The point I was trying to make is, if that's 10 trln rupees, the number is about the same in FY20 (2019-20) – 3.9% of GDP then, 3.9% of GDP now. So, what are they celebrating?

Q. Do you think the government can achieve the fiscal deficit target of 4.5% of GDP by 2025-26?

A. Yeah, it's much higher than the fiscal deficit target set by the last FRBM (Fiscal Responsibility and Budget Management) committee – 3.5%. They will achieve it easily. Having said that, given the level of limited execution capacity in the finance ministry, let me say it's imminently achievable, but they have to put in the hard work to execute it. If you look at their record of divestment, tax collections or even Budget analytics, it has not been forthcoming in recent times.

Q. What is your view on the government's estimates for receipt collections, which seem "modest" in your words?

A. I must congratulate the government for making modest estimates that match their modest revenue and disinvestment capabilities.  

Q. Do you think that the changes in tax rates under the new regime are likely to boost demand or is it just another political gimmick?

A. It's a welcome move, but it's not going to have any impact on the macroeconomic front. In a country like the UK, with a per capita income of 28,000 pounds a year, you start paying tax when you earn 8,000 pounds a year. So, you start paying tax roughly 1/3rd the per capita income in UK. In India, you start paying tax when you earn three times the per capita income. After all this chest thumping about being the fifth-largest economy in the world, our per capita income is of a poor country, which is why most people don't pay tax. Therefore, when you start doing these exemption-based changes, they are welcome because while the tax base is narrow, a simplified tax system generates more revenue than a complicated tax system. But the boost in revenue will not be of any order that will either affect the macroeconomy or solve the fiscal crisis.

Q. Allocation for the Mahatma Gandhi National Rural Employment Guarantee Act, or MGNREGA, has been cut, even though it is a demand-driven scheme. Do you think the government is underestimating expenditure?

A. It depends on how honest or dishonest the government wishes to be. MGNREGA is a demand-driven programme. So if there is demand, under the terms of the act, you are supposed to provide the employment and so, the central government shares that responsibility. It has a responsibility to provide such resources that can help meet the demand. Finance Secretary Somanathan has said that demand will be lower next year and that if it is higher, the government will spend more.

Tomorrow, if MGNREGA demand is not met, it is the politician who will have to bear the political consequences, not the bureaucrats. If disinvestment fails and there are less resources, you think there is anybody who will want to lower the allocation for NREGA in absolute amount? It was lowered because disinvestment failed. 

I would strongly encourage the government that instead of keeping all this (MGNREGA demand and allocation) mystical, put out its calculation on expected demand and take accountability if the calculation goes wrong. They should provide analytical reasoning behind the forecasts they have provided. There is none. 

Q. Can high capital expenditure help create activities that can generate employment?

A. Five most 'jobful' activities in this country are agriculture, textiles, housing, health, and education. These create good quality jobs. Is capex going to agriculture? I don't know. Through this capex, are we going to produce enough textile units that are going to produce shirts that we import from Bangladesh and Vietnam? There I know the answer; the answer is no.

Q. But the government is incurring capex on infrastructure creation. Does that not create jobs?

A. If that is the government's view of the binding constraint to employment generation, then I am afraid they are going to have a very unpleasant surprise. Infrastructure spending creates temporary employment. If the capex is being used for agriculture, textiles, housing, health and education, then I would say that the relationship of capex with employment is positive. I have no evidence that this is happening.

Q. Do you think the government is serious about managing its fiscal position?

A. The government is serious about managing its fiscal position. However, if the revenue-to-GDP ratio stays at 11.4 and disinvestment continues to fail, that would mean you will go from 5.9% to 4.5% of GDP, by cutting 1.4% of GDP expenditure. Then you expect to have a multiplier effect from the Budget. The exact opposite will happen – you will have a contraction effect.  End

Edited by Avishek Dutta

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2023. All rights reserved.

Informist, Tuesday, Feb 7, 2023

By Krity Ambey and Priyansh Verma

NEW DELHI – The government's failure to meet its disinvestment target year after year could perpetuate the "fiscal crisis" that India is going through due to a low tax-to-GDP ratio, says economist Rathin Roy.

"This Budget (2023-24) has managed the fiscal crisis; it has not solved or resolved the fiscal crisis," Roy, managing director of the London-based Overseas Development Institute, tells Informist in an interview.

The Budget has projected a tax-GDP ratio of 11.1% for 2023-24, down from 11.4% in 2021-22.

"I think the government seems to say politically that we will not be able to raise the tax-GDP ratio by too much, so what we will do is we will embark on the massive programme of disinvestment. But that is a failure," Roy says.

The lower tax-GDP ratio and the consistent shortfall in disinvestment receipts means the fiscal crisis continues, he adds.

In the last 10 years, the government has missed the disinvestment target on eight occasions.

According to Roy, the Budget for 2023-24 has made modest estimates, matching the modest revenue and disinvestment capabilities. 

"The government is not able to collect the revenues they project, so in order to keep borrowing under control, they keep cutting expenditure. So the expenditure-to-GDP ratio today is lower than it was before the pandemic, and has been continuously falling," he says.

The Budget has projected the expenditure-to-GDP ratio for 2023-24 at 14.9%, down from 17.7% in 2020-21.

Following are edited excerpts from the interview:

Q. You have been talking about a silent fiscal crisis because of a low tax-to-GDP ratio. Any improvement on that front?

A. This Budget has managed the fiscal crisis; it has not solved or resolved the fiscal crisis. Why do I say that? If you look at the aspirational tax-GDP ratio of this government since FY16 (2015-16), it was above 12% of GDP. They never met this aspiration. So, two years ago, the government reduced its aspiration and brought down the target, so they are meeting their lower target now. But this lower target means only 11.4% of GDP is coming to the government in the form of tax and non-tax revenues. That's pretty low for the ambitions the government has – capital expenditure, welfare spending, etc. So, I think the government seems to say politically that we will not be able to raise the tax-GDP ratio by too much, so what we will do is we will embark on the massive programme of disinvestment. But that is a failure. 

For this year, they claim in revised estimates that they would've divested 600 bln rupees. I challenge this claim because the total disinvestment till date is 387 bln rupees, how are they going to double the disinvestment in Jan-Mar? I am afraid that again, they will give us a false revised estimate. What happened in FY22 will again happen.

This consistent shortfall in divestment receipts combined with lowered modest revenue targets mean the fiscal crisis continues. The government is not able to collect the revenues it projects, so in order to keep borrowing under control, it keeps cutting expenditure. So, the expenditure-to-GDP ratio today is lower than what it was before the pandemic, and has been continuously falling. Next year, it is projected to fall by 0.4% of GDP, which is the projected fall in the fiscal deficit. Effectively, you're cutting the fiscal deficit by cutting expenditure.

Q. You say the government is adopting expenditure compression, not revenue expansion, as the prime method of consolidating fiscal deficit. But the compression has mostly been in consumption expenditure. Isn't that the right way to go?

A. Yes, that's the good thing this government has done. It has compressed discretionary government expenditure and that's good fiscal practice. Before the pandemic, almost 75% of our borrowing was for consumption. Now, if the government does what it says it will do, next year for the first time since 2006, consumption borrowing will be less than half the total borrowing. But that doesn't mean that because the government has increased the share of capital expenditure in borrowing, that has increased capital expenditure.

Q. In your latest column, you pointed out that the estimated combined capital outlay of the Centre and central public sector enterprises account for 3.9% of GDP in 2023-24 – the same as in 2019-20. So, are you saying the mega capital expenditure push celebration is hollow?

A. It's a bit childish to celebrate big numbers. The point I was trying to make is, if that's 10 trln rupees, the number is about the same in FY20 (2019-20) – 3.9% of GDP then, 3.9% of GDP now. So, what are they celebrating?

Q. Do you think the government can achieve the fiscal deficit target of 4.5% of GDP by 2025-26?

A. Yeah, it's much higher than the fiscal deficit target set by the last FRBM (Fiscal Responsibility and Budget Management) committee – 3.5%. They will achieve it easily. Having said that, given the level of limited execution capacity in the finance ministry, let me say it's imminently achievable, but they have to put in the hard work to execute it. If you look at their record of divestment, tax collections or even Budget analytics, it has not been forthcoming in recent times.

Q. What is your view on the government's estimates for receipt collections, which seem "modest" in your words?

A. I must congratulate the government for making modest estimates that match their modest revenue and disinvestment capabilities.  

Q. Do you think that the changes in tax rates under the new regime are likely to boost demand or is it just another political gimmick?

A. It's a welcome move, but it's not going to have any impact on the macroeconomic front. In a country like the UK, with a per capita income of 28,000 pounds a year, you start paying tax when you earn 8,000 pounds a year. So, you start paying tax roughly 1/3rd the per capita income in UK. In India, you start paying tax when you earn three times the per capita income. After all this chest thumping about being the fifth-largest economy in the world, our per capita income is of a poor country, which is why most people don't pay tax. Therefore, when you start doing these exemption-based changes, they are welcome because while the tax base is narrow, a simplified tax system generates more revenue than a complicated tax system. But the boost in revenue will not be of any order that will either affect the macroeconomy or solve the fiscal crisis.

Q. Allocation for the Mahatma Gandhi National Rural Employment Guarantee Act, or MGNREGA, has been cut, even though it is a demand-driven scheme. Do you think the government is underestimating expenditure?

A. It depends on how honest or dishonest the government wishes to be. MGNREGA is a demand-driven programme. So if there is demand, under the terms of the act, you are supposed to provide the employment and so, the central government shares that responsibility. It has a responsibility to provide such resources that can help meet the demand. Finance Secretary Somanathan has said that demand will be lower next year and that if it is higher, the government will spend more.

Tomorrow, if MGNREGA demand is not met, it is the politician who will have to bear the political consequences, not the bureaucrats. If disinvestment fails and there are less resources, you think there is anybody who will want to lower the allocation for NREGA in absolute amount? It was lowered because disinvestment failed. 

I would strongly encourage the government that instead of keeping all this (MGNREGA demand and allocation) mystical, put out its calculation on expected demand and take accountability if the calculation goes wrong. They should provide analytical reasoning behind the forecasts they have provided. There is none. 

Q. Can high capital expenditure help create activities that can generate employment?

A. Five most 'jobful' activities in this country are agriculture, textiles, housing, health, and education. These create good quality jobs. Is capex going to agriculture? I don't know. Through this capex, are we going to produce enough textile units that are going to produce shirts that we import from Bangladesh and Vietnam? There I know the answer; the answer is no.

Q. But the government is incurring capex on infrastructure creation. Does that not create jobs?

A. If that is the government's view of the binding constraint to employment generation, then I am afraid they are going to have a very unpleasant surprise. Infrastructure spending creates temporary employment. If the capex is being used for agriculture, textiles, housing, health and education, then I would say that the relationship of capex with employment is positive. I have no evidence that this is happening.

Q. Do you think the government is serious about managing its fiscal position?

A. The government is serious about managing its fiscal position. However, if the revenue-to-GDP ratio stays at 11.4 and disinvestment continues to fail, that would mean you will go from 5.9% to 4.5% of GDP, by cutting 1.4% of GDP expenditure. Then you expect to have a multiplier effect from the Budget. The exact opposite will happen – you will have a contraction effect.  End

Edited by Avishek Dutta

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2023. All rights reserved.