The measures taken by the Modi government to deal with the latest economic crisis are less inflationary than interventions by previous governments, Chief Economic Advisor Krishnamurthy Subramanian said, in an exclusive interview with Moneycontrol. The chief economic advisor, whose latest economic survey set the intellectual argument for the Centre to go for a fiscal expansion, also said states’ allocation for the COVID-19 vaccination programme could match that of the Centre.
“Even if it is equal, and even if states combined can match the Centre’s allocation of Rs 35,000 crore, based on what the expenditure Secretary said, that is a 100 crore people who can be vaccinated for free,” he said.
The chief economic advisor also said that the new ‘bad bank’ may take in at least Rs 2 lakh crore worth of toxic assets from the books of banks.
The larger themes of the budget have been discussed threadbare by now, including the infrastructure and capital investment push. However, some experts have said that given the levels of revenue expenditure and revenue deficit, the capex outlay could have even been higher, this year and next. How would you respond to that?
For the first almost five, six months of this fiscal year, we couldn’t do anything in terms of capital expenditure. The entire increase in capital expenditure this fiscal is being deployed in the second half. This was also reflected in the month-on-month figure. If you see October, the capex increased by 60 percent over September. November increased by 160 percent over October, December increased 60 per cent over November.
So in December, actually, we were spending almost six times on capex as much as we had spent in September. And that is what is expected to continue. Now if you look at the budget expenditures for the forthcoming year, both in terms of percentage of Gross Domestic Product (GDP), and in absolute numbers, India has never spent as much on capital expenditure. That’s two and a half percent of GDP, very significant. And it’s important because if you take the fiscal multipliers, some 2.2 to 2.5 gets added to that. So, 2.5 per cent times means 5.5 to 6 per cent growth is projected to come next year only from infrastructure.
One thing I would like to touch upon is why our policy response to the COVID economic crisis is different from the past. When the global financial crisis happened, most of the spending by the then government was revenue spending. One rupee in revenue expenditure adds 98 paise to the economy. That’s two paise lost and hence there is no multiplier effect. Revenue spending puts money in the hands of people and increases demand, but does not create any supply. Such a situation creates runaway inflation, which is what happened in the years after that. What we are doing is much effective because there have been interventions on the supply side during the ‘Aatmanirbhar Bharat’ announcements and demand side in the budget. So our measures are not as inflationary.
This government is of the belief that higher public investment will bring in more private sector capex as well. However, the finance minister’s predecessors, including the late Arun Jaitley and P Chidambaram also had similar views and kept on increasing capex in their budgets. It did not get the desired results on the private sector capex front.
Two things changed this year. One, the quantum of spending is significantly different and explicitly on infrastructure. You have spending on roads, railways, power and other sectors, which are important aspects for factors of production, especially in the manufacturing. During Chidambaram’s time, most of the focus was perhaps on revenue expenditure. Under Jaitley, the problem was that he had inherited a financial sector under severe stress. And without the financial sector actually being able to support it, private sector capital expenditure becomes difficult.
This year there have been very tangible steps that have been taken to deal with that. So there is the announcement of a new bad bank, which will be owned by state-owned and private commercial banks. So the decision-making will be faster. That bad bank will take in at least Rs 2 lakh crore of bad debt. As a result, the banks will have much less overhang from the bad assets, they can focus on lending, and therefore, it will help the flow of private capital expenditure.
The expenditure secretary told Moneycontrol earlier this week that just the Centre’s vaccination outlay of Rs 35,000 crore for 2021-22 is enough to vaccinate 50 crore people. Given that states and the corporates will also be allocating sums, how many people do you think can be vaccinated for free?
Health is primarily a state subject. In most circumstances, the Centre’s spending on health is one-third of total general government health spending, with two-thirds coming from states. In the case of the vaccination programme, the Centre’s spending is going to be more I feel. Even if it is equal, and even if states combined can match the Centre’s allocation of Rs 35,000 crore, based on what the expenditure secretary said, that is a 100 crore people who can be vaccinated for free. There is also the private sector because many companies will want to vaccinate their employees, at least in the organised sector. So, overall I think, the amount of funding that has been provided for vaccination i think is adequate.
The details of the bad bank have been provided by the financial services secretary. However, details of the proposed Development Finance Institution (DFI) is still sparse.
The majority equity ownership will be in the government, but whether it will be 100 percent or not is a call that will have to be taken. There is still some thinking going on that. A lot of homework has already been done on the DFI and the bad bank. The bill for the DFI could be tabled later in the Budget Session or early Winter Session. You will hear details on that very soon.