Budget 2024: As Modi 3.0 gears up for presenting budget 2024, expectations are rife that the budget will be much more than fiscal numbers. In an exclusive conversation with Republic Business, Lekha S Chakraborty, professor of NIPFP and Visiting Scholar at Cambridge University, shares her expert insights on the government's budgetary priorities, the feasibility of states' demands, and the delicate balance required between fiscal and monetary policy to sustain economic growth amidst global uncertainties. 

 

Edited Excerpts: 

 

On budget as the vision statement of the government

 

Well, we have to accept the fact that the coalition government is there. So, you know, the states have already raised their voice to get the special category status. So we should not forget that it's a coalition government. And what is the space they have to go ahead with economic reforms? That political-economic question is very relevant because they can't pitch it just like the last time, the economic reforms like demonetisation and all or any similar policies just like that because it's a coalition government. And regarding the growth, of course, it is promising and we have a downward risk from the global political crisis.

 

On states demands feasibility 

 

Well, the macroeconomic uncertainties are there and the centre and the states, they're equally facing these macroeconomic uncertainties and that's affecting the fiscal space of the states. So we need to tackle that issue from the states related to fiscal space. But if you ask me if the special category states that status is the answer to this, my response is no.

 

Instead of giving special category status to Bihar, Andhra Pradesh, and now Orissa is also coming forward because of the natural calamities and constrained fiscal space. But we can't entertain the demands from the states specifically or individually. What we can do is with the 16th Finance Commission, the tax-transfer devolution, if it can be increased from 41 per cent to around 50 per cent, I should say, then these problems can be tackled related to the fiscal space of the states.

 

Otherwise, if we start responding to the special category status from Andhra Pradesh, Bihar, and Orissa, and we don't know how many states will come forward because fiscal space is constrained, that's real and there are macroeconomic uncertainties. But the answer is not by giving the states special status, but by increasing the tax devolution magnitude. That's exactly what the 14th Finance Commission has done. They had increased the devolution from 31 per cent to 42 per cent.  

 

On the fiscal consolidation glide path

 

Well, the government will not deviate from the fiscal consolidation path because it will affect the investors' confidence and the rating. So that glide path towards 4.5 per cent by FY26, that's real. We have a fiscal consolidation glide path. We will peg the fiscal deficit around 5 per cent this year because we need to get it to 4.5 per cent. 

 

The path to fiscal consolidation, if it happens, is to cut down the spending rather than increase the tax buoyancy that affects the quality of fiscal consolidation. Right now the narrative is that we have a high fiscal deficit and high debt, but we tied it to capex spending. 

 

On the extent of fiscal consolidation versus growth

 

You said it. If we do a severe fiscal consolidation, that affects the growth recovery process. So for a moment, we should believe that this timely deficit is good.

 

We must believe that this timely deficit is good because it will help our capex formation and in turn the economic recovery process. And if you look at the growth numbers, it's capex-led, it's investment-led. So we can't do anything with a severe fiscal consolidation right now because it will definitely affect the growth recovery process and interest rate.

 

On the other hand, it remained high. You know, it is 6.5 per cent. When monetary policy focuses on price stability, fiscal policy needs to be accommodative with a little bit of deficits.

 

On Capex

 

Well, you know, this is the economic path forward, the capex formation. Of course, when I say capex, it's both physical and social infrastructure. Because infrastructure investment has multiplayer effects on the economy.

 

So we can't take a step back from the capex formation at all. And sustainability. If you're asking me about fiscal sustainability, we need to look into the cost of the credit and the growth of the economy.

 

And if the cost of the credit is lower than the growth of the economy, then we are growing out of the debt or growing out of all this financing pattern of deficit using a lot of bond financing. So I should say that we are sustainable. We are fiscally sustainable.

 

There is no rollover risk because the debt maturity pattern, if you look into it's all elongated, it's all longer. So we are on a robust growth path with the debt maturity pattern of our debt elongated. So there is no rollover risk.

 

On tax buoyancy

 

But tax buoyancy is the responsiveness of your taxes to the increase in the growth recovery process. And of course, it is above unity, it's above one. So the taxes are buoyant and the way we look at the tax buoyancy is, also from the perspective of fiscal marksmanship.

 

And there's good news over there, but we can't say whether that is a realistic projection or whether they have done a suboptimal projection so that they look better than they are. But of course, the taxes are buoyant and if the taxes are not buoyant, the only alternative is disinvestment proceeds. But you know, the story that the fiscal marksmanship, that's a deviation between the budget estimates and the revised estimates for the disinvestment proceeds, that fiscal marksmanship is not perfect for the fiscal proceeds from the disinvestment.

 

So we are hopeful about it. Otherwise, the debt or the deficit financing is the only way out. 

 

On Divestment Targets

 

Well, you know, I do not have any specific information about why disinvestment failed over the years.

 

But Tuhin, the secretary of DIPAM, mentioned that the divestment is a process. You know, it's more than a product, but turning it into fiscal proceeds requires time. But that process is very sincere.

 

And we don't know because it is not just about the fiscal proceeds. It's also about the dynamics of the labour market and the way we price it. So there are many elements to this dynamics of disinvestment.

 

So projecting disinvestment as a source of revenue, I think the government will be very realistic this time. You have said it, because we missed the targets like anything if project disinvestment proceeds very high this year, and if you don't get it, we don't have that fiscal space and that fiscal space will be affected by the expenditure design and that sudden shrinkage in the fiscal space affects our expenditure design. So I think the government will be very realistic in projecting disinvestment this year.

 

On three things the budget should address immediately

 

We mentioned the climate crisis, the global debt crisis, the energy crisis, and of course, the supply chain disruptions. So given all these things, the first thing is that the fiscal transition and the energy transition should move together. The policies related to climate resilience, are the public policies that should be given priority. If you look into the financial stability reports of RBI, the climate change crisis is appearing as one of the significant risk and uncertainty parameters.

 

So we should focus on the climate and we should focus on the climate responsive budgeting and ecological, fiscal transfer. That's of prime importance then. Second, the growth per se will not cut ice, the human capital formation will. So focusing on social infrastructure is very important. Given the mounting global inflation, the price stability objective of the RBI, by keeping the interest rate high, is not doing a good job or it's only having partial outcomes. So we need to have policies related to helping the people from the inflation crisis as inequality is widening.

 

On biggest economic worry

 

Absolutely. But I must add one more point to it. That is the Fed reserve of the US that's in a hawkish mode. Of course, they have done a pause in the rates, but they mentioned that it's already a pause, but not the peak rate. So when one central bank, the Fed, is increasing the interest rates like anything, or keeping the interest rate very high, that's inducing a kind of interest rate defence from the emerging world, we are also keeping the interest rate very high.

 

Otherwise, there will be capital flight because the hot money is fickle and that goes to the country where the interest rate is higher. So the interest rate defence is very crucial at this moment because capital controls or RBI, intervening in the forex market is not working very well. So how we do the interest rate management is very crucial.

 

And often people, economists suggest that we should keep the fiscal deficit under control because that affects interest rate management. But the fiscal deficit is not the villain behind the interest rate management right now. So the budgetary policy needs to be, needs to remain accommodative and interest rate management.

 

We need to do the interest rate defence because the Western world keeps interest rates high. Otherwise, we will have the negative interest rate quadrant. So you know that fiscal and monetary policy coordination is very crucial for sustaining economic growth.